Whatever the precise portfolio investment limits for the insurance funds, MAS will take the governance and deployment of these insurance funds into consideration, when assessing whether the banking group has de facto control of an investee company, and thus whether an investment meets the portfolio investment criteria for the banking group. Time frame and potential impact The separation of the financial and non-financial activities will be a major change for the banking groups. There will be significant corporate restructuring and divestment of assets. We must do this in an orderly manner, over a reasonable period. There is no reason to force a fire sale, which would weaken the banks and diminish confidence, and would be against the interests of shareholders and depositors. Local banks will be given three years to complete the restructuring and comply with the new requirements. The three years will commence from the passage of the relevant legislation, which should take place by the end of the year. MAS will work with the banks on a phasing and schedule, so that the restructuring and divestments can take place in an orderly manner and be completed within the three-year deadline. Tax treatment for divestment The divestment of non-permitted assets will have significant tax implications. In order to avoid uncertainty as to how IRAS will treat these transactions, and to minimise the tax impact on the banks of changes which have been mandated by MAS, the Government has decided on a set of one-off administrative concessions to facilitate this exercise.
I am not sure if this is a dimension covered in Professor Genberg's paper on Endogenous Dollarisation, but it is of particular relevance to Hong Kong. The third paper, to be presented by Professor Kumhof, deals with issues regarding price dynamics. Professor Kumhof's paper focuses on pricing policies and inflation inertia, at a time when we are experiencing deflation in Hong Kong: I am sure, however, that there are insights that we can derive from the paper and the discussion. Research on price formation is high on the agenda of the HKIMR and the HKMA, and possibly in academic and other organisations active in economic research in Hong Kong. We have had deflation for some five years now and we are still debating the relative importance of cyclical and structural factors behind that deflation. There is also debate on whether measures could and should be taken to limit the damaging effects of deflation, notwithstanding the fact that Hong Kong is a highly externally oriented economy. Views on price dynamics will contribute to these debates. As you know, the HKIMR was established by the HKMA. This reflects the importance we attach to thorough analysis of monetary and financial issues that Hong Kong is facing. Developments in the local, regional and global economies provide many opportunities for Hong Kong, but also serve as potential sources of risks. It is therefore critical that we actively seek to understand these developments.