Monetary Authority’s double standards undercut its ground

Author: Mrs. Regina Ip (Member of Legislative Council, Chairperson of Savantas Policy Institute)

Recently, in response to criticisms of its proposal to introduce guidelines to regulate bankers’ compensation, the Monetary Authority explained that it was following “international standards” set in the US and UK. If the Monetary Authority makes it a rule to replicate international practices, it will have a lot of soul-searching to do about its operations, soundness of business practices, corporate governance and mission.

 The Monetary Authority’s colonial lineage and limitations consequent on Hong Kong’s adoption of the currency board system makes it hard to compare it with full-fledged central banks. Yet experiences in the UK and US in revamping their regulatory agencies hold many useful lessons for Hong Kong. Legislative moves afoot in the U.S. to reform the Federal Reserve Board, in the light of its failure to prevent Wall Street from wreaking havoc on the rest of world, are particularly pregnant.
 One idea emanating from the Senate Banking Committee worth examining in Hong Kong is to separate the Fed’s  central bank functions from its bank regulatory role on the grounds that the Fed had been too cozy with the banks, and remiss in regulating their provision of mortgage and other forms of consumer credit and curbing their excessive risk-taking. In the wake of the Lehman fiasco in Hong Kong, where tens of thousands of retail investors had been bamboozled into buying high-risk, complex, structured financial products, prima facie there is a case for considering whether supervisory responsibilities in regard to banks and protection of investors should be vested in a separate agency. The Monetary Authority could be left to focus on its core functions of conducting monetary policy and acting as a lender of last resort in times of crisis.

 Such a proposition would naturally be unpalatable to Hong Kong’s quasi-central bankers who, stripped of their supervisory functions, would have little to do in conducting monetary policy, given Hong Kong’s adoption of the currency board system. The paucity of duties would make it hard for our central bankers to justify their mind-blowing, world record salaries.

 Policy makers in the UK and US have a point in moving to separate monetary policy-making from financial regulatory functions. In the UK, several banking regulators were placed into a single financial regulatory authority, the Financial Services Authority. Although the latter was also blamed for failing to see the financial crisis coming, it steers clear of promotion or development of the financial infrastructure, a sensible arrangement carefully designed to avoid conflict of interest.

 In the US, Senator Chris Dodd, chair of the Senate Banking Committee, had accused the Fed and other regulators of failing to foresee the financial storm because they were too close to the banks.
 Also worth our consideration is Representative Ron Paul’s proposal to  empower the Government Accountability Office to audit the Fed, which would open up the Fed to more public scrutiny and provide much-needed checks and balances. In view of the vastness of the reserves entrusted to the Monetary Authority, there is much to be said for subjecting our own Monetary Authority to the Director of Audit’s independent oversight, to ensure the soundness of its business practices and value for money.

 In view of the fact that our Monetary Authority’s subsidiary, the Hong Kong Mortgage Corporation, competes head-on with the private sector in providing mortgage guarantee and fixed adjustable rate mortgage programs, as and when our competition law has been enacted, there is a strong case for placing the Mortgage Corporation  under the purview of the future competition commission.
 Hong Kong’s smallness and fake credo in “small government” have traditionally prevented our financial authorities from setting up separate regulators for different financial services. But the coziness and close-knit nature of our business community and financial regulators argue for establishing a separate regulator for our Mortgage Corporation, as the US has done after its bailout of its giant home mortgage lenders, Fannie Mae and Freddie Mac. Our Mortgage Corporation’s involvement in purchasing home mortgages pales into significance compared to its U.S. counterparts. But it has a practically 100% market share in mortgage guarantee. The magnitude of the risk-taking calls for more stringent oversight as well as sounder, arms-length arrangement from its parent, the Monetary Authority. Otherwise, Hong Kong’s taxpayers  risk facing catastrophic consequences should the property market turn sour. The Monetary Authority’s position as the parent organization could amplify the moral hazard that has led to the downfall elsewhere of venerable financial institutions deemed “too big to fail”.

Post on 2009-11-29 South China Morning Post