BASEL II: PROBLEMS AND USAGE

(i) the central bank, i.e., the HKMA, (ii) the advisory committees – the Exchange
Fund Advisory Committee, the Banking Advisory Committee and
the Deposit-taking Companies Advisory Committee – that advise the Government
on banking and monetary issues, and (iii) the Hong Kong Association
of Banks (HKAB), a statutory body which sets the rules and standards
for banking practices and to exchange views with the Government for the
future development of the industry, among many other functions.
Hong Kong did not have a central bank before April 1, 1993 when the
HKMA was set up by merging the Office of the Exchange Fund with the
Office of the Commissioner of Banking of the Government. The HKMA
does not enjoy monopoly over the supply of money like its counterparts in
other countries. Banknotes in Hong Kong are issued by three private commercial
banks, namely the Hong Kong Banking Corporation (more commonly
known as HSBC internationally), the Standard Chartered Bank and the
Bank of China. The main objectives and central banking functions of the
HKMA are: (i) to maintain the stability of the Hong Kong dollar, within the
framework of the linked exchange rate system, through sound management
of the Exchange Fund, monetary policy operations and other measures
deemed necessary; (ii) to promote the safety and stability of the banking
system through the regulation of banking business and the business of taking
deposits, and the supervision of authorized institutions; and (iii) to enhance
the efficiency, integrity and development of the financial system,
particularly payment and settlement arrangements.
As far as the second objective is concerned, the main supervisory objectives
of the HKMA are (i) to provide a measure of protection to depositors
and (ii) to promote the stability and effective functioning of the banking
system through the regulation and supervision of authorized institutions
(AIs) and their businesses.
The HKMA’s approach to banking supervision has gone through several
phases over the years. In 2000 the HKMA started to switch from a
capital-based approach to a risk-based supervisory approach that emphasizes
the importance of identification and management of risk. The riskbased
approach follows closely the Basel’s supervisory framework and
emphasizes the assessment and management of various types of risk. It was
applied to medium and small local banks first in 2001, and then to large local
banks and foreign banks in the next year. In principle, the HKMA follows
this risk-based approach to monitor and assess the safety and soundness
of AIs on a continuing basis. Continuous supervision is implemented
through the following techniques:
(i) On-site examinations: The HKMA assesses at first hand how AIs
are managed and controlled by periodically conducting on-site examinations,
which can range from an investigation of a specific area to a comprehensive
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