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The two-pronged approach to banking supervision in Hong Kong

Norman T.L. Chan, Chief Executive of the Hong Kong Monetary Authority | July 23, 2014
The approach requires HKMA to monitor the asset-liability risk of banks as well as establish two permanent departments to supervise banks' business conduct and practices.

Hong Kong is the premier international financial centre in Asia. Our banking sector has grown steadily in recent years.  Seventy of the largest 100 banks in the world now have a presence here, and the total assets of the banking system have grown significantly, from HK$6.7 trillion in 2000 to HK$17.7 trillion at the end of May this year. The size of the banking system increased from five times of Hong Kong's GDP in 2000 to around eight times in 2013, indicating that the banking industry is growing at a faster pace than the economy as a whole.  (Please refer to Chart 1 for details.)

With such a vast amount of banking assets at stake (exceeding HK$17 trillion) — much of which is funded by deposits of corporations and members of the public — banking supervision with a view to protecting the safety of these assets is of utmost importance. In order to ensure the safety of customer deposits, the HKMA requires banks to conduct their business prudently, maintain adequate capital buffers and manage their credit, liquidity and other risks properly to minimise the risk of bank failures. During the 1960s and again in the 1980s, Hong Kong experienced a number of bank failures, resulting in seven banks being either closed or taken over by the Government. While there has been no bank failure in Hong Kong since the 1991 case involving the Bank of Credit and Commerce International, the operating environment for banks in Hong Kong has not been all "smooth sailing". The global financial crisis in 2008/09 demonstrated clearly that even mega international banks can and did get into serious difficulties as a result of improper risk management; and Hong Kong banks cannot be immune from the volatile international financial environment even if they are operating in a sound and prudent manner. 

Having learnt these valuable past lessons, the HKMA has been actively participating in international discussions in recent years on banking reforms, mainly led by the G20 and the Financial Stability Board. We are also committed to implementing the latest international regulatory standards in Hong Kong, such as the capital requirements and liquidity coverage ratio under Basel III, by introducing legislative amendments and new supervisory measures. 

There was a time before the global financial crisis, when the general belief among the banking sector, particularly in the US and Europe, was that banks should make the best use of their capital to expand their risk assets (including off-balance sheet assets) in order to maximise the returns for shareholders and management. Not only was this a misguided approach, it was also very dangerous. Because the banks' source of funding largely comes from customer deposits, blindly pursuing profits without proper understanding and regard to the associated risks could jeopardise not only the safety of the banks concerned but also the stability of the banking system and society as a whole. 

 

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