1 End-Year Review and Outlook for 2001 David Carse Deputy Chief Executive Hong Kong Monetary Authority 22 January 2001

2 Banks’ performance in 2000 and outlook for 2001 Most banks will show sharp recovery in profits for 2000 –mainly reflects decline in bad debt provisions –growth in pre-provision profits is more modest Banks are generally cautious about the prospects for 2001 –bad debt provisions should continue to fall, but –loan growth is still sluggish –margins may be further squeezed –profit growth should be more subdued

3 Work Priorities for 2001 (1) Deposit Insurance –we will review the results of the consultation just ended and make a recommendation to the Government on whether and how to proceed –the consultation has indicated broad support for DIS although the large banks remain opposed –if the decision to go ahead is made, we will move to the detailed planning phase –further consultation may be necessary –implementation unlikely to be before 2002

4 Work Priorities (2) Code of Banking Practice –section on credit cards finalized (better disclosure of terms and conditions, loss limit of $500, standardized APR, etc) –presently consulting industry on two further issues greater transparency about fees and charges and better advance notice of changes in these use of debt collection agencies –next main area to be covered is electronic banking –monitoring of adherence to the Code to be enhanced

5 Work priorities for 2001 (3) Interest rate deregulation –final phase due to take place at the beginning of July, provided conditions are not unfavourable –like last year, we will make a preliminary assessment of conditions in March and take a final decision in May on whether deregulation should proceed Commercial Credit Reference Agency: –consultation completed, indicating general support –working group set up to consider details –first meeting to be held shortly

6 Work priorities (4) Supervision of banks’ securities business –participate in discussions on the S & F Bill and related Banking Amendment Bill (No. 1) –further develop supervisory framework for exempt AIs in cooperation with SFC (including revised MoU) Introduce Banking Amendment Bill (No. 2) into Legco –approval of managers –regulation of advertisements for deposits over the internet

7 Work priorities (5) New Capital Accord –study latest proposals from Basel Committee and assess impact on Hong Kong banks –consult the industry and relay comments to Basel Committee by end-May 2001 Risk-based supervision –continue to develop and document our new approach –conduct further risk-based examinations of local banks –apply the new system to foreign banks –carry out on-site examinations of banks’ controls on electronic banking

8 Work priorities (6) Other aspects of our banking sector reforms –review the three-building condition on foreign banks licensed after 1978 to see whether it should be removed –review of three-tier structure (banks, RLBs, DTCs) postponed to 2002

9 Fees and charges (1) We have said on many occasions that deregulation may lead banks to raise fees and charges and to introduce tiered interest rates This is also part of a global banking trend as banks try to increase non-interest income The HKMA does not regulate bank charges –this would be difficult to reconcile with the objective of trying to improve competition and efficiency through deregulation of interest rates

10 Fees and charges (2) In a free market, competition among banks should keep charges at a reasonable level –consumers should shop around for the best deal But in order to do this, consumers need sufficient information to be able to make an informed choice –banks therefore need to ensure that their pricing is transparent and that customers are given sufficient notice of revisions to charges –hence, our proposed strengthening of the relevant provisions of the Code of Banking Practice

11 Fees and charges (3) Banks should also be sensitive to the impact of increases in charges on small account holders, particularly the more vulnerable members of the community We are in discussion with HKAB and the Social Welfare Department to see if steps can be taken to mitigate the impact on such customers

12 Consumer protection The HKMA does not have a specific mandate for consumer protection at present We are going to consider whether this is an area where we should become more involved - though this would probably require legislation and more staff There may however be a conflict with the HKMA’s prudential role, and we would need to consider whether the HKMA would be the right body to do the job