But it leads to another and another to the point where the money is simply too good to turn away, no matter how many red flags there are. There may be less pecuniary explanations too. Regardless of the profit potential, our sensitivity to warning signs can fade from lack of practice. For every time we look the other way, it is incrementally easier to ignore the next instance. On the flip side, each time we intervene, the next intervention is easier too. Effective compliance gets better with practice. Like ethics, it needs to be a habit. And don’t think that the bad guys don’t notice a firm’s reputation—or, dare I say, its culture. Word spreads quickly. A law firm or accounting firm or auditing firm can quickly become known for being “creative” in its approach to an internal investigation or issuing a tax or audit opinion. The same goes for corporate reputations for strong and weak compliance programs, or high or low tolerances for risk. Clients may be attracted to firms with reputations aligned with their goals, for good or ill. So, my first word of advice on where to go from here is to safeguard your corporate reputations by developing good habits. Just Because It’s Legal, Doesn’t Make It Right 3/6  BIS central bankers' speeches  That’s very high-level, prudential advice—not legal advice. A second point I’d like to emphasize is to avoid cabined views of what’s permissible or impermissible. Just because something is legal, doesn’t make it right.
In order to further enhance banks’ risk management in property mortgage lending and to strengthen borrowers’ resilience to withstand future interest rate hikes, the HKMA has just issued a set of guidelines to banks, requiring them to adopt an increase of 300 bps instead of 200 bps of interest rate when stress-testing the repayment ability of mortgage applicants. This measure is applicable to all types of mortgages, including residential as well as commercial and industrial property mortgages. The risk of overheating in the commercial and industrial property market also continues to rise. Our experience shows that the quality of commercial and industrial property mortgages will deteriorate more significantly than that of residential property mortgages during market downturns. In view of these circumstances, our guidelines have also required banks to lower the maximum LTV ratio of mortgage loans for commercial and industrial properties, whether or not for self-use, by 10 percentage points from the existing applicable levels. For example, for mortgage applicants with income mainly derived from Hong Kong, the maximum LTV ratio will be lowered from 50% to 40%. If the applicant’s income is mainly derived from outside Hong Kong, the maximum LTV ratio will be lowered from the current 40% to 30%. The HKMA has also required banks to standardise the maximum LTV ratio of mortgage loans for all standalone carpark spaces at 40% and the maximum loan tenor at 15 years.