Simon Topping, Executive Director, Banking Policy, HKMA explains Hong Kong's banking strengths
	David Marshall of Fitch Ratings says Hong Kong banks have a competitive edge for serving business in the region

Hong Kong is leading the world in adopting global best practice banking standards, strengthening its position as an international financial centre.

In January 2007, the city became the first of the major financial centres to implement new banking risk management standards, Basel II, as mandatory, in line with international Basel Committee recommendations.

Racing ahead of other countries which utilised a one-year grace period in order to further prepare, Hong Kong was ready and able to start this year, Hong Kong Monetary Authority (HKMA) Executive Director, Banking Policy, Simon Topping said. Having begun its preparations at an early stage, Hong Kong did not encounter the delays faced by other countries, he explained.

HK well prepared

The Basel II framework improves banks' credit, market and operational risks, ensuring they are up to global best practice.  

Equally important are the so-called "Pillar II risks", relating to interest rate, foreign exchange, liquidity, business cycle, reputation and strategic risk. Of these, Mr Topping cites "stress testing" to measure business cycle risk as the most significant for Hong Kong.

"This involves banks testing out how their business is likely to be affected by changes in economic activity and interest rates, so they don't get taken by surprise," Mr Topping said.

For companies doing business in the Asia Pacific - a region known for its market volatility - that gives Hong Kong an edge, he added. "The strengths of our banks in terms of capital, liquidity and risk management stand them in good stead against competition in the region," Mr Topping said.

Local knowledge

"Hong Kong banks also have tremendous local knowledge, great capital and liquidity strengths, and strong balance sheets for doing business.

"When the Asian financial crisis hit 10 years ago, a lot of banks in the region were affected, although Hong Kong banks did comparatively better than most. Basel II gives banks the opportunity to say we've not only survived it, we've learned the lessons, and we'll be much better prepared next time we face adversity."

Mr Topping added that Hong Kong banks are also recognising the business opportunities Basel II presents. "By increasing their ability to deal with a sophisticated range of risks, it builds up their capability to deal with business in the future. This in turn will further contribute to the efficiency and effective working of Hong Kong's international banking system, and enable them to make the most of the domestic, regional and China business opportunities opening up."

Leaders in banking

David Marshall, Managing Director of Fitch Ratings' Financial Institutions Asia, agrees Hong Kong's leadership approach to the new standard is positive for business.

"HKMA certainly has been one of the most proactive regulators in Asia in implementing Basel II. It has also been effective in maintaining the integrity of the original intent of Basel II, while taking account of the actual position of the banking sector in Hong Kong," Mr Marshall said.
 
"Having a strong yet practical financial regulator is a significant benefit for Hong Kong in the regional context. Implementing Basel II will help Hong Kong banks remain at the forefront of banking developments, in particular in the important area of developing expertise in managing risks and pricing financial products competitively.

"We believe that the ability to quantify and manage risks more effectively than peers is a competitive advantage in banking and could benefit Hong Kong banks in competing in local and regional markets."

Related links
Basel II
HKMA
Fitch Ratings