CURRENT PERFORMANCE INDICATORS

Hong Kong is one of the world's leading banking centres. Transactions are mostly international in nature, and its services being utilised by clients throughout the Asia-Pacific region. Although 1995 brought a number of international banking problems, Hong Kong's banking system remained stable and robust.

• At the end of 1995, the number of licensed banks stood at 185, with 41 new licences granted since 1990. A total of 1?64 local branch offices of retail banks spread across the territory. Hong Kong is home to 380 deposit-taking institutions, and 157 representative offices of overseas banks, coming from over 40 countries. Eighty five of the 100 largest banks in the world have a presence in Hong Kong.

• The volume of the banking system's external transactions was US$1,276 billion as at end-1995, the fifth largest in the world and the second largest in Asia after Japan. The turnover of the banking sector stood at $113 billion in 1995, representing a growth of about 18% over 1994.

• A locally incorporated bank has been rated the most profitable commercial bank in the world by an international credit rating agency (IBCA Ltd.) for two consecutive years.

• Hong Kong was rated as one of the most open, transparent and fair markets in which to conduct banking business in Asia in a National Treatment Study conducted by the United States Government in 1994.

• In 1994, the banking sector generated $70.2 billion in terms of value added and contributed 7.4% of Hong Kong's Gross Domestic Product.

• In 1995, the banking sector employed some 81?00 people, accounting for 2.7% of the total working population.

THE GOVERNMENT'S COMMITMENT

The Government is committed to maintaining Hong Kong's position as a leading international financial centre. A prosperous and efficient banking sector, which is the linchpin of the financial system, is an integral part of this objective. We seek to achieve this objective through the Hong Kong Monetary Authority by providing an appropriate legal and regulatory framework which :

• promotes the general stability and effective operation of the banking system and maintains public confidence in its integrity and stability;

• provides a measure of protection to depositors;

• ensures all authorised institutions under the Banking Ordinance operate in a responsible, honest and business-like manner;

• conforms with international supervisory standards and identifies in a timely fashion the risks arising from new banking products and financial instruments;

• ensures that the market remains competitive and attractive on the international front and allows maximum access by international service providers; and

• seeks to strike a balance between maintaining a "market-friendly" system and a robust supervisory system.

We will?

• enhance the risk management of authorised institutions by extending the capital adequacy framework to capture market risks in line with the proposal of the Basle Committee on Banking Supervision;

• promote good banking practices by developing jointly with the banking industry a Code of Banking Practice in 1996;

• continue to improve the transparency of banks through increased financial disclosure;

• encourage banks to be efficient and innovative by promoting competition;

• continue to enhance co-operation between the Hong Kong Monetary Authority and other financial services regulators in Hong Kong and overseas;

• establish a link between the payment systems of Hong Kong and China to facilitate the growing volume of financial transactions between the two economies; and

• organise the 1997 Annual Meetings of the World Bank Group and International Monetary Fund in Hong Kong to underline the territory's status as an international financial centre.

POLICY DIRECTIONS

We propose to :

• upgrade our market infrastructure, for example, by improving the payment system through implementing Real Time Gross Settlement by the end of 1996; and

• improve the liquidity position of banks by enlarging the secondary markets for assets, including the establishment of a Mortgage Corporation under the Hong Kong Monetary Authority which will, among other benefits, reduce the concentration risk of the banking sector.

The private sector makes its vital contribution by :

• continuing to develop new products to meet market demand and exploit new market opportunities;

• ensuring that its internal control and risk management systems can keep pace with product development; and

• continuing its vigorous efforts in quality improvement and efficiency enhancement.

Hong Kong is facing increasing competition from aspiring financial centres in the region. We need to ensure that the Hong Kong banking market retains its competitive edge in the face of a rapidly changing operating environment. A robust and predictable supervisory regime, together with a sound and open market infrastructure, should provide a firm foundation. However, it will be for the banks themselves to continue to take the lead in fostering the business development of the banking sector.

Secretary for Financial Services

March 1996