|
Spotting risks Questioning the status quo is the best way to spot emerging risks. Some say that history has a habit of repeating itself. I do not mind if it is something good, like winning a triple trio, or technological revolutions like the invention of the train, the telephone and the internet, which greatly improve our productivity and well-being. But the sentiment, when that phrase is used, is often a negative one suggesting a sense of helplessness: for example when financial crises occur and it seems that nothing has been or could be done to prevent them. We do learn from experience that a place as resilient as Hong Kong invariably comes out of a crisis stronger, although the process can be quite painful. And all of us, regulators and market participants, do make a lot of effort to understand the changes around us, identifying and managing the risks, if not to prevent the next crisis from occurring, then at least to minimise the adverse effects when it does come. Regrettably it is never easy to objectively assess the value of such efforts. Usually there is not a lot of public interest in this unless a crisis occurs. Even though we all say that prevention is better than cure, we never seem to value preventive efforts, at least not as much as those spent in successfully managing a real financial crisis. As a result, there is a danger, for regulators and financial institutions alike, of not giving preventive measures the attention they deserve. In a financial system as open and externally oriented as Hong Kong, we obviously should not let our guard down, although for precisely the same reasons it is not always possible for us to control our destiny. The origin of the financial crisis of 1997-1998 was, of course, outside Hong Kong and, even with the benefit of hindsight, there was nothing much that we could have done to prevent it. But we should still always be on the alert, more so than the large and relatively closed markets, because our size (not too big but liquid enough to attract international capital) and openness (the freest economy in the world) make us more vulnerable than others in an environment of financial globalisation. Being a financial regulator perhaps makes me a natural worrier. For what it is worth, my anxiety level has been increasing lately, although I have not been having nightmares. I was sound asleep in the early hours of 2 July 2007, after taking the opportunity to reflect on history and arrive at the conclusion that what happened ten years ago (Thailand dropped the peg between the baht and the US dollar on 2 July 1997, following heavy speculative attacks on the baht, marking the beginning of the Asian financial crisis) has a low probability of repeating itself now, although I know that financial crises never look alike. I took comfort not from the financial system of Hong Kong being somehow immune to external shocks - no system is immune - but from the results of the stress tests on the monetary and banking systems that we now conduct with increasing frequency using exceptionally stressful parameters. Anxiety of course is a very personal thing, and it is quite common for it to increase with age or experience. I therefore have no intention of transmitting my personal anxiety to others. In any case, the Hong Kong economy seems to be doing well, the financial system to be quite robust, and everybody seems to be having a good time. If there are disruptions, I think it is more likely that they will come from external sources. But still, readers should watch their radar screens because vigilance is a good habit. It is also a good practice to look behind the screen and ask unorthodox questions, even if you do not always find satisfactory answers. I can assure you that this will have a positive effect on your welfare. Take the subject of carry trades as an example. Why is it that the currency of a jurisdiction with large current-account deficits appreciates rather than depreciates against that of a jurisdiction with large current-account surpluses? How and when will these unusual and theoretically unjustified exchange-rate trends change? Will those conducting carry trades continue to feel comfortable about the trade-off between interest-rate gains and exchange-rate risks? What is the probability of major shifts in the monetary policies of jurisdictions experiencing anomalies among exchange rates, external imbalances, interest rates and inflation rates? Is there enough time and liquidity for the carry trades to unwind without undermining monetary and financial stability? These are good questions to be asking.
Joseph Yam ¡@ Click here for previous articles in this column. ¡@ |
¡@
