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Following is the keynote speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Asian Banker Summit 2004 today (May 6) (English only):
Establishing the Pillars of Sustainable Growth
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Ladies and gentlemen,
It is my great pleasure to address you today at the Asian Banker Summit. On behalf of the Hong Kong Government, I would like to extend my warm welcome to all of you, particularly those who have travelled from within or outside the region to Hong Kong to participate in this conference. The fact that the event has brought together the best brains of the financial sector in Asia under one roof speaks for itself that this is worth the time and effort.
I must also congratulate the organiser of the Summit for choosing the right place, Hong Kong, to host this event. We have managed to maintain a high degree of banking stability without a single case of bank failure despite a collapse in property prices of nearly 70% within a period of five years, not to mention all the various shocks that our economy has encountered. No doubt Hong Kong has been one of the most resilient and stable financial markets in the world.
This is the right place, and also the right time. We all know how much the financial market and economic situation have changed globally over the past few years, and how fast the banking business has evolved. Though the primary function of banks is still to recycle capital from savers to borrowers, banks' risk-management systems have become far more sophisticated than before. The growth over the past decade of market instruments for spreading risk among institutions has been remarkable, with the development of credit derivatives probably the most impressive. Corporate financial behaviour has changed as a result of the rapid development in the capital markets. For the retail business, it has gone from bank branches to automation, and now probably back to branches again for more a personal touch in some countries. Interest rate fluctuations also pose substantial challenges. All these developments are critical to the banking business. To survive and to establish his position in this field, no one can afford to be complacent. This forum has provided a good opportunity for both bankers and regulators to come together to share experiences and insights on how we can move forward together.
Like many of you, I take a personal interest in the development of the banking sector. As a former banker, this subject has become even more dear to my heart since I became the Secretary for Financial Services and the Treasury, with the job of maintaining and promoting Hong Kong's position as an international financial centre. A sound and healthy banking sector is in fact the very foundation of a flourishing economy. And in turn, a stable, open and competitive investment environment plus a well-developed financial market help create unlimited opportunities for the banking industry. Today I would like to share with you three pillars, not the three pillars of Basel II, but the three pillars which have contributed to Hong Kong's success as a leading international financial centre in the region, from a banker's perspective.
Financial Stability
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The first pillar, financial stability, is the cornerstone of our success as an IFC, and has been fully demonstrated in our financial markets over past decades. I believe this is a key consideration for many international corporations choosing to establish their regional headquarters here in Hong Kong.
Enhancing financial stability has always been one of the driving considerations behind many government regulatory policies and objectives. To this end, our key financial regulators, namely the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC) and the Office of the Commissioner of Insurance, have all adopted a risk-based supervisory approach, which aims to strengthen supervision and enforcement over high-risk areas and avoid undue restrictions that will discourage market development initiatives.
Maintenance of adequate capital has always been a key ingredient of banking stability. Capital adequacy requirements, if properly devised, provide a good measure of protection against the potential losses of a bank, and can foster the confidence of depositors not only in the bank itself, but also in the banking system as a whole. When the Basel Committee on Banking Supervision introduced the first global capital adequacy standard (Basel I) in 1988, Hong Kong was one of the first jurisdictions to adopt the standard. This supervisory tool has served Hong Kong well.
As I said earlier, the nature of banking business and the types of risk banks are exposed to nowadays have become much more complex, along with the globalisation of financial services and the evolution in information technology. There is clearly a need for banking supervisory tools to keep up with changes in the marketplace, to track the risks faced by banks and to ensure that they are prudently managed. With its focus on the management of risk, Basel II represents a major step forward in terms of encouraging banks to enhance their risk-management capabilities through the provision of capital incentives.
It is in the interest of Hong Kong as an international financial centre to gear up for the implementation of Basel II by the end of 2006. We already have the initial support of the banking community, which has been diligently following international developments on the subject and making its own preparations. We shall work closely with the banking community in the coming three years to get this important task accomplished in a manner that will best serve the long-term development of the Hong Kong banking system.
Sharing of customer credit information under a proper framework also contributes significantly to banking stability. The sharing of positive consumer credit data in Hong Kong took effect in June 2003 after extensive public consultation and revisions to privacy laws. We believe that the sharing of more positive credit data will enable banks to make better credit decisions, lower the cost of lending and help reduce the problem of personal bankruptcies. We are also establishing a Commercial Credit Reference Agency for the sharing of commercial credit data of small and medium enterprises in Hong Kong, which should come into operation later this year.
In another move to strengthen the stability of the banking sector, we have proposed the establishment of a Deposit Protection Scheme in Hong Kong. The Scheme will provide a safety net for small depositors in the event of a bank failure, and help prevent the occurrence of bank runs by giving assurance to small depositors. The legislation providing for the establishment of the Scheme was just passed by the Legislative Council yesterday. It will take approximately 15 to 18 months for us to put together the essential components for the launch of the Scheme, which we hope would take place some time in 2006.
Quality Market
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Quality is the second pillar. A quality market has always been Hong Kong's trademark, both for goods and services, and in particular financial services. This is characterised by a world-class financial infrastructure, up-to-date laws and regulations, as well as sound corporate governance.
Our clearing and settlement systems are world-class. To enhance settlement efficiency and reduce settlement risk of US dollar and euro transactions in Hong Kong, we established the US dollar and euro clearing systems in August 2000 and April 2003 respectively. This enables US Dollar and euro transactions to be settled through Hong Kong on a real-time basis during Asian operation hours. The system also provides real-time and end-of-day Delivery versus Payment (DvP) services for US dollar and Euro denominated securities and equities traded in Hong Kong, as well as real-time Payment versus Payment (PvP) services for foreign exchange transactions between US dollar, HK dollar and euro.
To facilitate settlement of cross-border securities transactions, the Central Moneymarkets Unit (CMU) of the HKMA assumes a more international dimension and plays a role in Asia akin to that of international central securities depositories. The one-way inbound links from Euroclear to CMU and from Clearstream to CMU were extended to two-way links in November 2002 and January 2003 respectively. These newly established real-time outbound links enable investors in Hong Kong and elsewhere to hold and settle Euroclear and Clearstream debt securities directly via their CMU accounts in a secure, DvP environment.
Our systems are already good, but we want to enhance them further. We are working on legislation to formalise the oversight role of the HKMA in relation to important payment systems and to provide statutory backing for finality of settlements effected through such systems.
Sound corporate governance is another essential ingredient to a quality market. In Hong Kong we have been giving priority to corporate governance reforms, by pressing ahead with the initiatives under the Corporate Governance Action Plan. These include upgrading listing rules, enhancing the regulation of IPO sponsors, implementing the new Securities and Futures Ordinance, and proposing changes to the regulation of different aspects of directorship, shareholders' rights and corporate reporting. Another key initiative is to enhance the oversight of auditors and the quality of financial reporting. The Action Plan, which I initiated last year, is making good progress and will result in significant advances in corporate governance in Hong Kong.
Sound corporate governance is particularly important for banks, because the failure of a bank may have a systemic impact on the banking system as a whole. Corporate governance of banks in Hong Kong has been reasonably strong. The banking sector in Hong Kong survived the Asian financial crisis without much of a blemish while weak corporate governance has, among other things, caused the failures of a few banks in the region. The HKMA has issued guidelines to strengthen banks' corporate governance. The major requirements include adequate board oversight and an appropriate level of checks and balances. The HKMA also meets with the local banks' board of directors on an annual basis.
The quality and integrity of the key players of a company is also the key to sound corporate governance. The appointment of directors and chief executives of banks in Hong Kong has always been subject to approval by the HKMA. Since 2002, banks are further required to have adequate systems of control to ensure that only fit and proper people can be appointed as their senior executives. Banks also need to comply with the financial disclosure requirements set out in the HKMA's guideline to enhance transparency and market discipline.
Market Development
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The third pillar is our commitment to market development. I personally chair a Financial Market Development Task Force, which aims to promote development in the various sectors of the financial market, namely bond market, fund management, banking, equity and insurance.
Hong Kong is well-positioned to become a bond centre. Our sound legal system, well-established financial market infrastructure, efficient and transparent regulatory regimes, free flow of information and capital, simple and low tax system, open capital markets and first-class human resources inspire confidence in both bond issuers and investors. Apart from these fundamental advantages, the Government has done a lot to promote the bond market, including simplifying the issuance process and offering tax incentives. One recent Government initiative has been to deepen the bond market by providing more diversified products for our retail and institutional investors. This will not only help attract overseas capital, but also enhance the healthy development of our financial markets.
Securitisation is one of these products. In Hong Kong, this is gradually gaining strength. The Hong Kong Mortgage Corporation (HKMC) has been issuing mortgage-backed securities since 1999. More recently, synthetic securitisation and credit card receivable securitisation began to appear. Securitisation is not only a tool for developing the bond market, it is also useful for financing infrastructure projects. The Hong Kong Government has just successfully launched a bond programme that securitises the income of five toll tunnels and the Tsing Ma Bridge which raises about HK$6 billion. Separately, subject to the approval of the Legislative Council, the Government plans to issue not more than $20 billion worth of government bonds to finance capital projects.
Hong Kong is also a staunch supporter of the development of the regional bond market. We co-chair with Thailand and Korea the APEC Initiative on Development of Securitisation and Credit Guarantee Markets. The objectives are to promote the understanding and awareness of the importance of securitisation and credit guarantee to bond market development in the region, and to assist APEC member economies in identifying market impediments and taking concrete steps to remove them. Thanks to the encouraging response from the member economies, the Initiative has achieved very good progress so far.
With an efficient financial services industry and high concentration of fund management companies, Hong Kong is also well placed to be an international asset management centre. We will continue to strive to provide a favourable market environment for international fund management companies. For instance, we will amend the law to exempt offshore funds from profits tax. We will also continue to improve our regulatory regime so as to provide a favourable market environment for the launch of new investment products and the reach of international funds to the local market. In this regard, the launch of the Capital Investment Entrant Scheme since September 2003 has received a very encouraging response. Over HK$560 million has been attracted into Hong Kong within half a year. The potential is huge.
Our close economic relationship with the Mainland is another unique advantage of Hong Kong. The full implementation of the Mainland and HK Closer Economic Partnership Arrangement (CEPA) on January 1, 2004 offers great market access and flexibility for Hong Kong's financial services suppliers and professionals to conduct business in the Mainland. For the banking sector, CEPA has substantially lowered the asset requirement, from US$20 billion to US$6 billion, for Hong Kong banks to set up branches in the Mainland. Operational and profit assessment requirements have also been relaxed for Hong Kong banks. The concessions have added a significant comparative advantage to our local banks.
Meanwhile, we have successfully launched the scheme for providing personal renminbi business in Hong Kong by our local banks. The scope of business includes renminbi deposit, remittance, exchange and renminbi bank card business for individuals in Hong Kong. The scheme has greatly facilitated the visits of people between the Mainland and Hong Kong, and has provided a new channel for the flow of renminbi funds between the two places through the banking system.
Conclusion
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To conclude, I believe it is a fact of life that financial markets will get more and more complex in a globalised economy. There is no single formula for either supervision or profit making. To ensure sustainable growth, it is most important to get the fundamentals right, and at the same time to be flexible enough to tap market opportunities. Our three pillars, stability, quality and market development have served Hong Kong well, and we will ensure that they continue to underpin success.
Thank you, I wish this Summit every success.
Ends/Thursday, May 6, 2004
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