MR CHAN KIN-POR (in Cantonese): President, I joined the Bills Committee on Financial Institutions (Resolution) Bill in 2016. The original intent of the legislation was to target the financial institutions that are “too big to fail” (referring to some large international financial institutions at the time) for fear that their failure would have a knock-on effect on other financial institutions and thus put the entire financial system at risk. The current proposal of the Hong Kong Monetary Authority (“HKMA”) that even small and medium financial institutions should be subject to the loss-absorbing capacity (“LAC”) requirements under the resolution regime of Hong Kong is obviously a departure from the policy intent.
HKMA indicated, in addition, that the failure of small and medium financial institutions would affect customers with deposits. This implies that the existing Deposit Protection Scheme is imperfect. Then why do we not review and improve the Scheme, but instead use another rule with fundamentally different objectives to accommodate the situation?
In fact, HKMA’s significant tightening of the capital requirements and risk management requirements on banks in the wake of the financial storm has resulted in higher operating costs for banks. At present, it is not uncommon for a medium bank to have hundreds of staff to deal with compliance requirements, hence a big cost hike. Consequently, the capital adequacy ratios and liquidity ratios of the banks in Hong Kong have increased considerably. In fact, the banks in Hong Kong are in very sound condition as many have exceeded HKMA’s requirements. However, on the contrary, the huge costs incurred to the banks by the LAC requirements weaken their foundation for operation and make them more prone to problems.
HKMA pointed out that the average cost of issuance of Tier 2 capital instruments in October 2017 was slightly less than 4%, but it is now 2018 and the global economy is headed towards crisis. I predict that Hong Kong’s property and stock markets will fall and the interest rate will keep rising. This situation is a far cry from that when HKMA conducted the study in 2017 in terms of social environment, interest rate, cost, and so on. I think HKMA should re-examine the actual costs so as to avoid misjudging the situation and thus unjustifiably causing small and medium banks to bear the brunt of a significant increase in their costs.
I understand why HKMA had to do this. It certainly wanted to reduce the risk of failure to zero but, in fact, everything has its price tag when it comes to reducing risks. I am most afraid that the Government is making a well-intentioned mistake. The original intent of the legislation was to bring stability to the financial sector, so that the Government does not need to assume responsibility in the event of bank failures. However, without judicious implementation on the part of the Government, it will only backfire on the banks with increase and unnecessary addition of operating costs, thus weakening their strength and making them more prone to failure.
Moreover, Hong Kong has to follow international standards, but should not adopt the most rigorous set of practices in the world. For example, while the resolution regime in the United States applies only to G-SIBs (global systemically important authorized institutions), D-SIBs (domestic systemically important authorized institutions) are also covered in addition to G-SIBs in Hong Kong. Why should we include even small and medium banks? As regards the timing of implementation, our rival Singapore does not have so much as a timetable, but we will proceed to implementation in 2022. Small and medium banks are deeply worried. Therefore, I expect the Government to be careful in implementing or formulating the code of practice.
HKMA said that there would be great flexibility in implementation. I hope it will actually be achieved. It is precisely because the international regulatory body noticed different situations around the world that it has allowed for flexibility. I absolutely do not wish to see the Hong Kong Government select the harshest measures to implement.
After listening to the hearings and the views of the Bills Committee, HKMA proposed to raise the asset threshold from $150 billion to $300 billion, which was welcomed by the industry. Nevertheless, HKMA also undertook to conduct a review of the LAC requirements every three years. The industry hopes that the Government definitely adds a consultation session to gauge the views of the industry during the review exercise in order to ensure that information reflecting the real situation will be collected.
Another concern for small and medium banks is that although they have not reached the threshold, the Government may take other measures to reinforce their soundness. What will these measures be? Will they be harsher than the LAC requirements? I do not wish to see the Government do such a stupid act. Instead, I expect it to firstly, as pledged, seriously address the concerns raised by Members and the industry, and then make adjustments in accordance with the capital financing conditions for the banks and on the markets of various countries. I hope the Government will implement these practices, and refrain from causing major harm to the banks in Hong Kong in order to fulfil a good purpose. Thank you, President.