Mr. Carse reviews the impact of the Asian crisis on the Hong Kong banking sector Speech by the Deputy Chief Executive of the Hong Kong Monetary Authority, Mr. David Carse, at the Sixth Conference on Pacific Basin Business, Economics and Finance in Hong Kong on 28/5/98. I am pleased to have the opportunity to talk to you about the impact of the Asian financial crisis on the Hong Kong banking sector. The Asian financial crisis is one year old this month, though this is a birthday that we do not want to celebrate. The crisis can be dated from late May when the Thai Baht came under severe pressure. A renewed attack in early July, while we were celebrating the success of the Handover in Hong Kong, led to the floating of the Baht, which promptly plunged in value. The contagion then spread to neighbouring economies, and although Hong Kong was for a time immune, it eventually reached us too. Explaining the origins and causes of the Asian crisis has become a major growth industry and I have no intention of adding to the debate today. Suffice to say that one point on which almost all the commentators are agreed is that weakness in banking systems in the region has been one of the main reasons which explains the intensity of the crisis and the speed with which it took hold.
It also BIS Review 48/1998  -3-  reflects the fact that some banks are wanting to cut back on their Asian exposure and Hong Kong is one of the few markets where it is possible to do so. This will have the benefit, from the local banks’ point of view, that it will push up lending margins; and over time this will attract more banks back into the market and encourage them to lend. But the appetite for new lending is likely to remain subdued in the short-term. As already mentioned, the fear of increased bad debts is another factor which is making the banks wary about increasing their credit exposure. The combination of regional difficulties and domestic slowdown makes it inevitable that asset quality will deteriorate this year. In the first quarter of the year there was a noticeable rise in loans overdue for more than 3 months, although as a percentage of total loans the figure for the local banks (less than 2%) is still reasonable by international, let alone, regional standards. As to how much worse the situation will get as we go through the year, it is difficult to say. But we can take comfort from the fact that although loan arrears in the all-important residential mortgage market are creeping up, the amounts involved are still very small in percentage terms (only around 0.3% of the local banks’ mortgage portfolio at end-March).