Hong Kong as a risk management hub

Amidst all the developments in financial markets, the thing of international financial centres competing with each other remains on the sidelines but is an exciting area.

Mr Norman T L Chan of HKMA discusses how HK’s international financial centre is shaping as a risk management hub:

About 15 years ago, a senior banker suggested to me that, in order to further promote Hong Kong’s position as an international financial centre (IFC), we should turn Hong Kong into a “risk management hub” in Asia. However, he did not elaborate further at the time on exactly what he meant and how this could be achieved. To be honest, it was not clear to me then what this risk management hub idea was all about.

Now looking back, I realise that, even without us consciously pursuing the idea as a policy objective, Hong Kong has already made major accomplishment as the “risk management hub” in Asia. Let me explain.

Clearly an important pre-condition for a risk management hub is to have money or capital flowing through Hong Kong. In this context, it is important to distinguish genuine financial flows from those that are not.  Many of you may recall that, in the 1990s and prior to the Asian Financial Crisis, many Japanese (regional) banks used Hong Kong to conduct the so-called euro yen businesses, through which the banks would book in Hong Kong their yen loans to borrowers in Japan, presumably to benefit from more favorable tax treatment.  While this kind of booking businesses may inflate the size of Hong Kong’s banking system in terms of total assets, it does not, as we have learnt from the experience of the euro yen booking in the 1990s, bring about much real benefits to Hong Kong in terms of job creation or enhancement of the credit underwriting skills of the bank practitioners.  The lending institutions did not perform any meaningful risk management functions in booking these euro yen businesses.  As we all know, the euro yen business in Hong Kong, driven by tax reasons, faded away right after the Asian Financial Crisis.

That is why the HKMA has made it clear in the past 10 years that we do not welcome banks moving “pure” booking business to Hong Kong. Our position is that, in booking any loans or other assets in Hong Kong, the banks must demonstrate that they have the necessary capability and control process to prudently manage the risks of these assets, both at origination and on an ongoing basis.  Then there is still the basic question: how do we attract financial flows to Hong Kong instead of to other financial centres?  There is a bit of chicken and egg problem here.  Unless restrained by capital controls, money is highly agile and risk sensitive and will migrate to centres that offer the greatest efficiency and safety.  In other words, money tends to move through centres that provide a high standard of risk management.  By handling more financial flows, a centre will be able to further improve and innovate on its risk management capability.  The process is interactive and there would be a clustering effect once a centre has established the leading position in risk management and client servicing.

Here I should mention several important developments in the last decade that are highly relevant and instrumental to Hong Kong’s rise to become the risk management hub in Asia.

The developments which have shaped HK as a risk management hub are:

  • Internationalisation of Renminbi (RMB)
  • Stock Connect
  • Asian Equity Derivatives Hub
  • Bond Connect
  • Mainland-Related Lending
  • Wealth Management
  • Soft Power

In soft power, he stresses on human capital:

At the end of the day, any premier IFC must possess superior soft power if it wishes to sustain such position. Soft power is the sum of a wide range of tangible market infrastructure and intangible strengths.  While there must be a robust but market-friendly regulatory regime, we need to have a high degree of professionalism amongst the industry practitioners.  Fully cognizant of this principle, the HKMA has in the last decade or so launched many soft power enhancement schemes for the banking industry.  One of the enhancement initiatives was the setup of the Treasury Markets Association (TMA) in 2005 through the merger of the Treasury Markets Forum and ACI-The Financial Markets Association of Hong Kong.  I floated this idea in 2004 and received full support from the industry practitioners.  The TMA was set up with the clear mission to enhance the professionalism of industry practitioners and the competitiveness of the treasury markets in Hong Kong.  In addition to offering high-quality training programmes, the TMA has recently joined the Global Foreign Exchange Committee as Hong Kong’s representative and played an active role in developing the FX Global Code on good practices in the FX market.

In pursuing soft power enhancement, the HKMA has worked closely with the TMA and also the Hong Kong Institute of Bankers in launching modules of the Enhanced Competence Framework (ECF). We will launch another two more ECF modules on operational risk management and compliance shortly.  You are of course aware of the launch of the Academy of Finance by the HKMA in June this year.  The Academy has two core missions: financial leadership development and monetary and financial research, including applied research.  The Academy is a new venture and we will work closely with all the stakeholders, including the TMA, to upgrade the soft power of Hong Kong as the premier financial centre in Asia. 

Finally:

Ladies and gentlemen, international competition between financial centres is very fierce and will likely to be even more so going forward. Business can and will flow quickly away from Hong Kong if we somehow fail to upgrade the standards of our financial services.  In conclusion, let me say that to become “an international risk management hub” is synonymous to becoming “an international financial centre”.  No IFC can exist or compete if it is not also a risk management hub in delivering the various forms of financial intermediation, including the money, banking, capital, asset management and insurance markets. 

I don’t really think there is such creature as a “pure” risk management hub as opposed to an IFC.  In other words, it is hard to contemplate how a place can turn into a risk management hub if money and capital do not flow through it. 

Well said.

He also stresses on the need to monitor firm culture and not be too greedy in taking higher risks.

 

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