We are fortunate that banks in Hong Kong did not and still do not compete on their ability to make maximum returns for shareholders by taking excessive risks, but rather on their conservative and sound operations. Banks in Hong Kong have not followed the aggressive practices employed in the past by many banks in the US and Europe. Indeed, the HKMA did not and will not allow banks to operate with capital ratios just at the minimum level required by international standards. In addition to the HKMA's stringent day-to-day supervision, the fact that Hong Kong's banks have all along maintained capital buffers higher than most of their counterparts in the US and Europe also contributes to the confidence depositors and the public have in our banks. A high capital adequacy ratio provides banks with buffers to absorb bad debts and other losses when necessary. Therefore, I cannot subscribe to the notion that banks in Hong Kong would be placed at a competitive disadvantage compared with other banks because the HKMA imposes additional or higher regulatory requirements on top of the international minimum standards under Basel III. Competition among banks should focus on quality of services and safety of the institutions rather than maximising profits with the lowest possible capital adequacy ratio.
Universal Banking — Moving with the Times
If the banks are managing their on- and off-balance sheet risks prudently and ensuring protection for customer deposits, this begs the question — does it mean that the HKMA has fully fulfilled its supervisory function? The short answer is no. Why? Because the HKMA is responsible for approving applications for banking licences in Hong Kong and the monetary authority's supervisory powers and responsibilities under the Banking Ordinance cover all aspects of the banks' operations. The banking regime in Hong Kong allows universal banking, that is, banks can operate like "financial supermarkets". Once an account is opened with a bank, in addition to enjoying basic banking services, the customer will be able to conduct various financial transactions including equities, bonds, funds, insurance and other wealth management products. Although banks in some overseas jurisdictions still practice segregated banking, that is, they only offer banking services and are not allowed to provide securities and other wealth management services, universal banking has become an international trend. More and more jurisdictions are adopting this regime since it offers customers the convenience of a one-stop service to meet the needs for investment and other wealth management services of today's customers.
However, a fundamental problem arises with the "financial supermarket" business model, and it stems from the special trust that exists between banks and their customers. In modern times, people rarely store their wealth at home because it is both unsafe and inconvenient. And, wealth sitting at home cannot generate returns over time. So, most of us place our liquid financial assets with banks that we trust, which allows banks to have an overall picture of customers' income, size of deposits and the wealth bracket to which they belong. This unique relationship, which is based on special trust, makes it easier for banks to market various wealth management and financial products to their customers.
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