Mr. Yam looks at Asian banking in a regional and global context Address by the Chief Executive of the Hong Kong Monetary Authority, Mr. Joseph C.K. Yam, at the ADB-IIF Forum on Developing Asian Financial Markets held in Fukuoka, Japan, on 10/5/97. I am pleased to be here this morning to address you on the subject of Asian banking in a regional and global context. I will be speaking particularly about banks in the East Asia region. The importance of banking stability 2. There is increasing international recognition of the importance of a sound banking system in promoting macroeconomic stability, sustainable economic growth and the efficient intermediation between savings and investment. The last few months have seen a series of initiatives by international financial institutions and groupings to devise principles, standards and strategies for the promotion of financial stability. While these initiatives have been directed principally at emerging markets, they also have application to the more developed markets which have been by no means immune from banking problems in recent years. A number of Asian economies, including Hong Kong, have participated in this work. This is a practical recognition that the setting of international regulatory standards must be a broadly-based process, in keeping with the global nature of today’s financial markets. 3. I do not need to belabour the point about the debilitating and disruptive effects which banking problems can have on economic and monetary management. The need to restore the capital of failed banks can impose a heavy fiscal burden.
Banks need therefore to develop a broadly-based lending business where the borrower’s ability to repay is the first consideration and collateral is there as the second line of defence. More generally, it will usually be sensible for banks to try to diversify their business into areas which offer the ability to earn fee income and thus reduce their  BIS Review 55/1997  -6-  dependence on the interest-rate cycle. I hasten to add, however, that this should only be done if the necessary systems and controls are in place. 27. In some cases, the changes required by banks to meet the challenges of a more competitive environment may be too great for them to meet on their own. Mergers may be required to produce fewer and stronger banks, and I am aware that in some countries this process is being given official encouragement. 28. This points to the fact that the regulators also have their part to play in encouraging the process of change in banks. While the prime responsibility for prudent management of banks does rest with the banks themselves, the authorities do have a role to play in ensuring that effective systems of supervision are in place. These should include incentives to discourage the excessive taking of risk by banks, including that owners should be required to have a significant amount of capital at risk and to bear the losses should a bank fail.