Hong Kong's International Financial Centre: Retrospect and Prospect

Since there is such an intimate connection with monetary policy, might it make sense to
leave macro-prudential responsibilities for banking, securities, and insurance markets to the
HKMA, but then to carve out a more focused agency for detailed supervision of all firms serving
analogous functions in a dynamic marketplace? The subsidiary form planned for the UK’s new
Prudential Regulatory Authority might ensure that such an agency would remain closely linked
to the HKMA. The HKMA could continue to set major banking policies and manage Hong
Kong’s IFC strategy. The separate agency, in turn, could operate closer to markets with the aim
of preventing problems from developing. 70
In the wake of the Lehman mini-bonds incident, moreover, continuing debate is warranted
on the idea of establishing an agency separate from both the HKMA and the SFC specifically
charged with responsibility for consumer financial protection, much like the new agency being
set up in the United States. Aside from reducing the risk of task overload, a key plausible source
of regulatory failure in modern financial markets, such distinct agencies can play a fundamental
role in healthy democracies. They can champion policy objectives related to efficiency and
fairness, help render difficult policy choices clearer, and make more transparent the process of
policymaking. 71
Perhaps the December 2010 decision of the government to establish under the
SFC an Investor Education Council and Financial Dispute Settlement Centre will prove to be
steps in this direction. The fact that claims brought to that Centre can end on binding arbitration
is positive, but with the line between securities markets and banking markets continuing to blur,
the case for a stronger official agency should not be considered closed.
Other rationales for separating out such agency mandates, including the mandate for an
insurance supervisor one step removed from central government, also suggest themselves. Given
70 An recent collaborative economic study concludes: “Tighter restrictions on bank activities are negatively
associated with bank efficiency while greater capital regulation stringency is marginally and positively associated
with bank efficiency. In addition, a strengthening of official supervisory power is positively associated with bank
efficiency only in countries with independent supervisory authorities. Independence coupled with a more
experienced supervisory authority tends to enhance bank efficiency. Financial transparency is also positively
associated with bank efficiency.” Lingnan University, Department of Economics, Report on Hong Kong as an
International Financial Center for China and for the World, 2010, Chapter 2.2.
71 Arner, Hsu, and Da Roza (2010) disagree. They propose a “twin peaks” structure, with the HKMA responsible
for monetary and financial stability, prudential regulation of all financial institutions—including banks, securities
firms, and insurance companies, and with the SFC or a successor institution responsible for the regulation of
securities market conduct regulation as well as of all financial products across all sectors. They would also leave the
HKEx with responsibility for listing rules but subject it to the enhanced enforcement powers of the SFC. They
would split the prudential and consumer protection functions of the Mutual Provident Financial Authority and the
Office of the Commissioner of Insurance and move them respectively into the HKMA and the SFC under the twin
peaks structure. Finally, they would render more equivalent and transparent the bank deposit insurance scheme and
the evolving scheme for consumer compensation in securities markets and merge associated agencies into the HK
Deposit Protection Board. My own view, again, is that this would all load too much into the mandate of the HKMA
in particular. There are good reasons, especially good political reasons in a democracy, to resist the supposed
imperatives of bureaucratic efficiency implied by such a plan. Not least, the increasing concentration of powers and
authorities in the central bank would render the HKMA into even more of a political target that it already is. A less
politicized central bank, with buffering agencies between it and the government, would reduce moral hazards in
good times and provide more policy options during bad times.
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