I am encouraged by the fact that the Basle Committee has recently intensified its efforts to reach out beyond the G-10 countries and to take a more proactive leadership role in helping to strengthen banking supervision in all countries. In particular, the recently issued consultative paper on Core Principles for Effective Banking Supervision is an important milestone. The Core Principles are intended to establish minimum requirements which would apply in all supervisory systems. It is intended that supervisory authorities around the world should use them as an agenda against which to assess the adequacy of their own systems and to press for changes to address any deficiencies. The Core Principles will also increasingly become the standard by which outside commentators, including other supervisors, judge the supervisory framework of individual countries. This external discipline will help to provide an additional incentive to improve supervisory systems. The Hong Kong Monetary Authority is proud to have been one of the supervisory authorities which participated in the drafting of the Core Principles. We were also members of the Working Party of both G-10 and non-G10 countries which recently prepared a report on measures to foster financial stability which was submitted to the meeting of G-7 Finance Ministers last month in Washington. This includes recommendations not only on the formulation of sound principles and practices, but also on how these can be effectively implemented, including the role of international financial institutions in this respect.
I am not denying that a capital regime to cover market risk is necessary, particularly for those countries like the United States whose banks are heavily involved in trading activities. We are intending to introduce the regime in Hong Kong by the end of this year, and a number of countries in the Asian region are intending to do the same. However, they are doing so largely to be seen to be adhering to international standards, rather than because their banks are running substantial trading risks. Even in Hong Kong, which has the fifth largest foreign exchange  BIS Review 55/1997  -3-  market in the world and the seventh largest derivatives market, the incorporation of market risk will have only a minor impact on most banks’ capital adequacy ratios. The concentration on market risk has perhaps led to other supervisory areas not receiving the attention which they deserve. In particular, credit risk still remains the main risk facing most banks, and it is therefore disappointing that there are still no internationally agreed guidelines in areas such as loan classification, bad debt provisioning and non-accrual of interest on non- performing loans. Most countries in Asia, including Hong Kong, do have their own rules in these areas but the lack of an agreed standard makes it difficult to undertake cross-country comparisons of asset quality. I hope, therefore, that this is an area which can be addressed by the Basle Committee in the near future.