LCQ6: HKMA's Supervision of Banks in Hong Kong (15

Press Release

LCQ6: HKMA's supervision of banks in Hong Kong October 15, 2003

Following is a question by the Hon Emily Lau and a reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council

Question:

It has been reported that following the exposure of the questionable loan made out by the Bank of China (Hong Kong) Limited to New Nongkai, the Hong Kong Monetary Authority (HKMA) deployed a working group to conduct thorough investigations on all local Chinese banks, to find out if unusual arrangements had been made for their major loan accounts. In this connection, will the Executive Authorities inform this Council:

(a) of the reasons for the HKMA's deploying a working group to conduct the above investigations and the results thereof;

(b) whether the HKMA has taken other measures to ensure the quality of the loans granted by Chinese banks; and

(c) whether the HKMA deploys staff to conduct regular investigations on banks to ascertain if unusual arrangements have been made for their loan accounts; if regular investigations have been conducted, of the number of such investigations, the banks investigated and the results thereof respectively in the past three years; if regular investigations have not been conducted, whether the HKMA will consider doing so with a view to preserving the confidence of local and international investors in local banks?

Reply:

Madam President,

1 First of all, I would like to emphasize that the banking supervisory standards of Hong Kong are fully in line with international standards and are consistent with those in other major international financial centres. This is confirmed by the very satisfactory results of the International Monetary Fund's recent assessment of Hong Kong's compliance with the Bank of International Settlement's core principles of banking supervision. Further, the effectiveness of Hong Kong's supervision of banks is demonstrated by the fact that Hong Kong has a sound and stable banking system which has a high capital adequacy and liquidity ratio as well as good asset quality.

On the questions raised by the Hon. Miss Emily Lau, I would like to provide the following information -

(a) The HKMA has conducted a series of specialised on-site examinations to review the policies, procedures, and systems of control in respect of lending activities, the loan classification system and adequacy of loan loss provisions of a number of institutions. However, under the restriction of section 120 of the Banking Ordinance, we cannot disclose the identity of these authorized institutions or details of the findings of these examinations.

(b) Under section 120 of the Banking Ordinance, we cannot comment on our supervisory approach for individual or a specific group of authorized institutions. Generally speaking, the HKMA's supervisory approach is based on a policy of "continuous supervision" through a combination of on-site examinations, off-site reviews and prudential meetings. It is consistent with the relevant Basle Committee's Core Principles on Banking Supervision. In line with the practices of banking regulators in most other financial centres, the HKMA adopts a risk-based approach where the amount of supervisory efforts devoted to a particular institution would depend on the HKMA's assessment of the risk profile and risk management system of the institution concerned. In relation to asset quality, the HKMA regularly conducts comprehensive and specialised examinations to review the asset quality of authorized institutions. The frequency and scope of these examinations will vary from institution to institution, depending on the HKMA's assessment of the institution's credit risk, credit risk management system, lending policies and procedures, level of problem loans and adequacy of loan loss provisions, etc. Apart from conducting regular and specialised on-site examinations to assess the asset quality of authorized institutions, the HKMA also conducts on- going analysis and assessment of the asset quality of individual authorized institutions by reviewing information collected from the statutory returns and other sources. Asset quality is also a common topic discussed at the HKMA's prudential meetings with the Board and senior management of individual institutions.

(c) The HKMA conducts regular on-site examinations on all authorized institutions in Hong Kong.

2 A total of 778 on-site examinations were conducted by the HKMA in the last three years (261 in 2000, 232 in 2001 and 285 in 2002) and 190 on-site examinations were conducted in the first eight months of 2003. These examinations can take the form of either a comprehensive examination or a specialised examination. Under the risk-based supervisory approach mentioned earlier, the objective of a comprehensive on-site examination is to review whether the risk management systems in place are effective and adequate to identify, measure, monitor and control the various risks commonly associated with an authorized institution, namely, credit, interest rate, market, liquidity, operational, legal, reputation, and strategic. The scope of these examinations will normally cover a wide range of an institution's operations. A specialised examination usually focuses on specific areas of concern or interest which have come to the attention of the HKMA. If any of these examinations identifies any weaknesses or deficiencies in the institutions' operations or control and risk management systems, the institutions concerned will be required to take appropriate and prompt actions to address the problems.

Again, I would like to stress that the banking sector in Hong Kong is financially sound and stable, and the supervisory standards of banks in Hong Kong are fully in line with international standards. The HKMA will continuously review and enhance its supervisory approach to authorized institutions by taking into account experience learned from exercising its functions.

Thank you, Madam President.