The problems with subprime loans spread to other parts of the world economy The subprime loans were repackaged into new investment instruments which were later sold to investors in other countries. As it became increasingly evident that these securities were probably substantially overvalued, it came to light that a number of banks had suffered large losses. The uncertainty over which banks had suffered the largest losses made the banks unwilling to lend to one another. The financial crisis escalated when the US government decided in autumn 2008 to allow US investment bank Lehman Brothers to fail. The unease on the global financial markets increased and the financial crisis that had started in the United States developed into a global crisis. The supervision in the financial markets has been insufficient With hindsight, we can observe that many investors took excessive risks. The risk price they had calculated on was too low. It can also be noted that the credit rating agencies gave the new financial products too high ratings because they had not taken sufficient account of the risk that it would not be possible to sell these products in the market. At the same time, the supervision of the financial markets did not give sufficient consideration to the problems that can arise when a house price bubble bursts. The remuneration structure in the private sector has moreover encouraged short-term thinking and substantial risk-taking.
Our challenge, therefore, is to evolve successfully in the face of this shift and it is a philosophy that the HKMA has been actively pursuing in the past few years – exploring new policy headroom, improving our financial infrastructure, promoting Hong Kong’s offshore renminbi business in overseas markets in collaboration with the financial industry, and co-operating with other places, such as London, Paris, Australia, Malaysia and Thailand in developing renminbi business. A competition of soft power among international financial centres 11. As I have emphasised on many occasions, the competition among international financial centres is essentially a battle of soft power. That is not to say hard power is not important. Quite the opposite, the building of hard infrastructure such as airports, transportation system, telecommunications, and efficient offices, is a prerequisite for entering the race. Yet it can only go so far. Funds, especially at the wholesale level, tend to flow to and aggregate in the more efficient and safe financial centres. Therefore, the race ultimately depends on soft power, which is made up of a wide range of qualities and strengths that are difficult to quantify. They include, the most important of all, the rule of law, protection of property rights and intellectual property, the taxation regime, the soundness of financial institutions, the robustness of supervisory frameworks, the competency and integrity of professionals, such as financial practitioners, accountants and lawyers, the free flow of information, the free and convenient movement of people, and a favourable business environment.