There is also the question of what is the end-result of the merger in terms of market share. It may be necessary for more than two banks to get together in order to achieve a significant increase in scale. But the more banks that are involved in a merger, the greater the complexity of achieving strategic fit and cultural harmony. The attitude of the HKMA This reinforces the general point made earlier that successful execution of M&A is not an easy task. However, despite the potential pitfalls, the HKMA continues to believe that consolidation of the local banking sector is desirable and probably inevitable. This is for the reasons I have already mentioned. In general, it is difficult to see how a banking system like Hong Kong's, which is open to the forces of global competition, can resist the pressures that are leading to consolidation in other banking systems. In terms of Hong Kong's particular situation, while it is always dangerous to extrapolate current market conditions into the future, it does appear that organic growth is going to be more difficult to achieve than it was in the years before the Asian crisis. This lays greater stress on the need for smaller banks to find a strategy that will differentiate themselves from their competitors and enable them to earn an adequate return on capital. This will not be straightforward, particularly since a number of the potential business options such as wealth management involve heavy set-up costs that need scale to justify them.
That is a truly terrible choice and so the key thing is to find a new set of measures that can be deployed to give us a tolerable course. That set of measures is what constitutes a resolution regime. It is not about making things perfect. It is about coping. We can all learn from the US’s special resolution regimes in this respect, including the extensions in scope to bankholding companies and non-bank financial firms affected by the Dodd-Frank Act. But there are things being debated in Europe and in the international community that may even supplement the toolbox that exists already in the United States. One of them is the potential ability for the resolution authority to haircut creditors and partially convert debt into equity in what is otherwise a firm with a viable underlying franchise and so potentially a going concern. This would be an adaptation of Chapter 11 regime in the US rather than the standard special resolution toolkit for banks. This set of issues is, at its very core, a cross-border endeavour. We will not get far on this front without much more intimate and trusting co-operation between home country supervisors and resolution authorities and host country authorities. We should not exaggerate the extent to which this has worked well in the past. Supervisors even admit that behind closed doors.