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Hong Kong Banking Sector Consultancy Study

22 March 1999

Hong Kong Monetary Authority
30/F, CitiBank Tower
3 Garden Road
Central
Hong Kong

Attn:    Mr WONG Hing Fung
            Resources Centre

Dear Sirs,

Hong Kong Banking Sector Consultancy Study

We are writing with our comments on the above Study’s proposals.

Overall, we are supportive of the general direction of the study, in so far as it favours greater liberalisation of the sector. However, we feel that the conclusions reached are in some cases too conservative. We are also disappointed at the narrow scope of the review, which does not adequately take into account relationships between banking and other sectors.

In more detail our comments are as follows:

1. Banking/securities divide. As the study notes, banks are increasingly engaging in securities transactions, and indeed in other financial services not within the traditional scope of banking. As the study also notes, governments in some other jurisdictions are responding to such financial conglomeration by merging regulators. Superregulators spanning the banking and securities sectors have been established, in different ways, in the UK and Australia. It is disappointing that the study did not consider the question of the relationship between the HKMA and other financial services regulators in Hong Kong, for example the Securities and Futures Commission, or the Insurance Commission.
   
   
2. Three-tier system. We support the simplification of the current three-tier system, but wonder whether it is in fact necessary to retain two tiers, i.e. whether a single licence status would be sufficient. The reasons quoted in support of retaining two tiers seem contradicted by the other evidence cited, e.g. the fact that independent RLBs and DTCs have a market share of less than 2%, and the recommendation (which we support) that licensing status not be the sole criterion for access to RTGS.
   
   
3. One branch rule. We support the relaxation of the one branch restriction, but rather than the proposal merely to raise the limit on the number of branches to three we urge full liberalisation immediately.
   
   
4. Asset size criteria for foreign banks. We do not see the rationale for retaining an asset size criterion, or any other criterion, for foreign banks that is different from the requirement for domestic banks. It is hard to see how any such discrimination can be reconciled with the principles of the WTO, or indeed, with Hong Kong’s aspirations to be an international financial centre.
   
   
5. Bank deposit insurance. We have serious concerns with the analysis in this section, and with the recommendation that the introduction of deposit insurance be considered. Firstly, there seems to be no reference to the debate over deposit insurance conducted in Hong Kong in 1991/92. The conclusion at that time was that deposit insurance was not suitable for Hong Kong in view of the moral hazard and other demerits of such schemes. We attach to this letter a copy of our submission of May 1992 to the Monetary Affairs Branch. At the very least the present study must explain why it now proposes to reverse the conclusions of the 1991/92 exercise. Secondly, the discussion of the issues seems very incomplete. While bank runs can be distressing to individual banks and to bank regulators, it is questionable whether they are destabilising to the system as a whole. Some authorities (e.g. Benston) argue that in bank runs depositors merely transfer their money from less sound banks to those perceived to be more sound, with little harm, and possibly net benefit, to the system as whole. The provision of deposit insurance can actually be more destabilising since it may inure depositors and bank managers alike to the risks of poor lending. We urge that this proposal be seriously reconsidered.
   
   
6. Interest rate rules. We have no sympathy with the laboured arguments presented in the document for further delaying full liberalisation of interest rates in Hong Kong. It is to Hong Kong’s shame that these restrictions have remained in place, allowing banks to exploit consumers, for so many years. The IRR should be abolished immediately.

We hope that the above comments are helpful.

Yours sincerely,

Alan LUNG Ka-lun

Chairman

Enclosure: Submission to Monetary Affairs Branch on "Deposit Protection scheme" dated 17 May 1992