You will recall that the overnight rate reached 280% on 23 October 1997. Although the overnight rate quickly subsided, term rates remained high for some weeks thereafter and the stock market experienced considerable volatility and property prices fell. Renewed exchange rate pressure in January again saw interest rates spike upwards, though the reaction this time was less severe. Nonetheless an inverse yield curve persisted during much of January with the interbank rates higher than the prime lending rate. Also during this period, the banks have had to contend with the blows to confidence from continuing regional upheavals, most notably the liquidity crisis in Korea around the turn of the year and the dramatic events in Indonesia which are still being played out. Coupled with mounting evidence that the domestic economy is slowing down, it is not surprising that the banks in Hong Kong are going through more difficult times. The severity of the Asian crisis is a once-in-a-lifetime event and no banking system in the region can hope to be unaffected by it. There is bound to be an impact on the banks’ funding and liquidity, their loan growth, their asset quality and ultimately their profitability. Apart from the effect on individual banks, the Asian crisis will also have repercussions on Hong Kong’s position as an international financial centre, given that so many regional and international banks affected by the crisis are based here. How precisely has the Asian crisis impacted on banks in Hong Kong?
This is a “belt and suspenders” approach to capital regulation. The leverage ratio will help contain the buildup of excessive leverage in the system, serving as a backstop to the risk-based regime and safeguarding against banks’ attempts to “game” the risk-based requirements. Equally critically, the risk-based framework helps ensure that banks do not game the leverage ratio. Let’s not forget that simple measures like a leverage ratio have been in place in the past and did not alone prevent banking failures. BIS central bankers’ speeches  1  Risk-weighting is difficult but vitally important. Therefore the Basel Committee is in the process of reviewing the risk-weighting regime of the capital framework to ensure that it is as simple and comparable as can be while still capturing the risk profile of banks’ varied asset portfolios. Complexity is a byproduct of the desire, among regulators and banks, for risk sensitivity. Risk measurement will never be perfect. Simplicity, however, can sometimes come at a cost. Ignoring risk does not make it disappear. Without measuring risk properly, we may allow it to build up undetected. Operating only with a non-risk-based leverage ratio creates incentives to shed safe assets and to increase the riskiness of asset portfolios; to forgo risk-reducing hedging strategies because they could result in higher capital requirements; and to engage in off-balance sheet activities and other sophisticated structures that expose a bank to contingent risks. This is likely to increase the aggregate risk in the economy and thereby create global financial stability concerns.