Indeed, we have just had a case of co-occurrence of highly remunerated financial innovation and a temporary narrowing of the intermediation spread that was built upon, among other things, a serious erosion of credit standards. We all know how this ended; rather miserably with investors losing a lot of money and borrowers finding credit expensive and hard to come by, and consequently considerable damage to the economy. How do we deal with this conflict? I am afraid I have no answer, other than always to be alert to it and be ready, as protectors of the public interest (in terms of maintaining stability, upholding integrity, promoting diversity and efficiency in financial intermediation) to act whenever the private interest of the financial intermediaries threatens to override the public interest. But this is easier said than done, particularly when financial innovation is often packaged and presented skilfully by financial intermediaries as an effort to enhance financial efficiency. Furthermore, in capitalist, free-market economies, the authorities generally do not have a lot of influence over innovation. The financial intermediaries often constitute a strong political lobby against regulation, arguing quite forcefully that regulation stifles innovation and progress. And so, regrettably, we have an environment that is often not conducive to the financial authorities taking preventive measures to protect the public interest. You have I am sure heard of the rather unkind and unfair street talk that the US Treasury was being run largely by Wall Street.
I believe this is one of the main reasons why X in T+X in the settlement of some financial transitions is still a number other than zero, or why T+X is still not replaced by RTGS DVP even though the technology to do so has been available for some time. Very simply therefore there is a case for the authorities to get involved, as a developer or a service provider, when a private sector solution that is in the public interest is not available. And the public interest is not just in the enhancement of financial efficiency but also in the limitation of contagion and the more effective achievement of financial stability. The Hong Kong Monetary Authority has devoted much effort to the building of the financial infrastructure of Hong Kong. I can assure all of you that it is well worth the effort and the amount of public money involved is really quite modest, although it may take a little time, and some appropriate prudential guidance concerning, for example, the management of payment and settlement risks, to convince potential users before traffic in these financial highways builds up. Allow me to end this address with an advertisement. In Hong Kong we now have RTGS systems for the Hong Kong dollar, the US dollar, the euro and the RMB. They are all linked together to achieve cross-currency PVP in our time zone and they are linked up with our debt-clearing system to achieve DVP.