While banks have also suffered capital shortfalls as this crisis progressed, at least in its early stages liquidity was at its core. As our capital markets and the trading activities of our banks expanded, the risk-management paradigm was that the liquidity of markets would be resilient. It is surprising that some big banks, not all, ran such truly massive maturity mismatches. And it is similarly surprising that many medium-sized banks in this country had liquidity portfolios comprising largely floating rate notes issued by other banks. Yes, it does of course cost more to hold gilts and other highly liquid assets; but an illusory liquidity portfolio just transfers the risk to the central bank or the government. Some banks and building societies have not looked distress in the eye over the past year and in earlier years endeavoured to run their business safely, foregoing some of the profits of the boom. But I would urge even them to recognise that their relatively calm passage through the crisis to date owes a lot to government standing behind their peers. The banking Social Contract That support cannot go on forever, which underlines why the Social Contract for banks must be redrawn. It must be redrawn to reflect the lessons from the crisis. And also to mark a credible shift in regime so that, as an industry, you can re-establish trust and stand on your own feet. Traditionally, there have been three elements to the Social Contract for banking.
If we have faith in the operation of the market economy, the answer to the question whether we should worry is "No, we shouldn't ". What we are witnessing is no more than the inexorable playout of the process of comparative advantage - perhaps one of the most proven laws of economics. Comparative advantage hinges on relative factor endowments and their productivity. Some of these characteristics are, in large measure, static. Thus, for example, relative to other locations Hong Kong has an abundance of deep water but a dearth of flat land. This, very obviously, yields us a strength in port facilities over agriculture. Other characteristics evolve dynamically, such as our relatively well educated and qualified labour force; when this is set against the shortage of space, it is hardly surprising that Hong Kong should specialise more in providing high value-added services than in labour-intensive or space-hungry manufacturing. As regards absolute cost levels, it is the high value added by members of the workforce in particular sectors which generates and justifies their high pay. The fact that Hong Kong appears to be, overall, a rather expensive place, relative to the majority of neighbouring economies, is a consequence and symptom of its success. As anyone can see by just looking around, this doesn't mean that we can no longer win any business. But we can only afford to pay ourselves what we are worth.