Having said that, the HKMA will of course have its own views on what levels of sophistication of risk management we would expect to see in different types of banks. While we won’t mandate particular approaches, we will expect to see levels of risk management that are commensurate with the types and levels of risk being run. So, for example, we won’t necessarily expect even a large bank with significant credit risk to implement advanced IRB. But we would expect a bank of such a type to have a fairly advanced internal credit rating system. As another example, we would generally expect banks with a significant level of market risk to implement a models based approach to measuring the risk. BIS Review 31/2003  1  This flexible approach - in contrast to the approach being adopted by some other supervisors, who are mandating that particular approaches be adopted by particular types of banks - is, we feel, the most appropriate approach for Hong Kong. In Hong Kong we have a wide variety of banks, RLBs and DTCs. We have different nationalities. We have different sizes. We have banks that focus on the retail market, and ones that focus on the wholesale market. We have banks that specialise in mortgage lending, ones that specialise in SME lending, and ones that are jacks of all trades. It’s perfectly appropriate, therefore, that with such a wide variety of banks there should be a wide variety of credit risk management and other risk management practices.
The real point is whether, given the bank’s particular circumstances, the risk management practices they adopt are adequate. And that, primarily, is a matter for the bank’s management to determine, although we will of course, given our statutory responsibilities, also have an interest in this. I stress these points for three particular reasons. First, because I don’t want anyone to think that we are against banks taking risk. We’re not. That’s the business they’re in. We simply want to make sure they recognise and manage the risk effectively. Second, because I want to make clear that we are not hell bent on driving banks to invest in unnecessarily sophisticated risk management systems. What’s appropriate will clearly vary from bank to bank, depending on the nature and scale of their business and the risks they run. Third, because I want to be perfectly clear that Basel II is not some underhand means of making life difficult for smaller banks by raising the hurdle too high in terms of what they need to spend on risk management and on regulatory compliance. Indeed, on the contrary, the whole thing is carefully designed so as to accommodate banks of all shapes and sizes. So, how will Basel II change banking in Hong Kong? The answer, I would suggest, is that we won’t see any dramatic changes overnight, but we will over time see some re-focusing of how the risks within banks are addressed, both by banks themselves and by the supervisors.