The subprime crisis was a body blow for the U.S. economy, but it left Hong Kong largely unscathed, said Hong Kong Secretary for Financial Services and the Treasury K. C. Chan during a visit to New York.
Professor Chan said Hong Kong was watching how the deterioration in lending and the drop in housing prices would affect economic growth in the U.S., because this would affect Asian economic growth.
Speaking at a May 12 seminar jointly hosted by HSBC, USA, the Hong Kong Economic and Trade Office in New York and Hong Kong Association of New York, Professor Chan said that while he did not intend to join the chorus of criticism of the current crisis, he thought it was useful to know how the international community viewed the problem.
Professor Chan said the roots of the subprime crisis are exposed for all to see, and it has shown the risk-control problems at banks. The banks have over-relied on what their risk models are telling them about their risks in portfolios and how to hedge these risks.
“They have overlooked the concentration risk, and when liquidity dries up, they end up having a large portfolio of assets whose values have collapsed,” he said.
Asking what lessons were to be drawn from the crisis, Professor Chan said it was a full-scale financial crisis in a globalized world and one that exposed many gaps in the financial system.
“There are gaps in the regulatory system in many countries, such that many of the financing activities are unregulated. There are gaps in the international system of regulators. It shows the need for more information sharing and coordination in dealing with financial stability issues.
“I think these gaps are real. The current crisis shows in a dramatic way how individual weaknesses in our financial regulation and risk management can come together and put our global financial system at risk. It demands that we take seriously the task of reforming our regulation.”
Professor Chan warned of any knee-jerk reaction that would damage the financial system, and stressed that the urge to over-regulate should be resisted.
“We should recognize that it is not the purpose of financial regulation to prevent market participants from making mistakes. No regulation can prevent asset bubbles from happening or traders from taking excessive risk.
“Crashes will happen, just as bubbles will build up,” he said. “It is the prospect of periodic crashes and the risk of failures that will check the risk-taking behavior of traders.”
Professor Chan told the audience it was not the purpose of regulation to prevent failures. The purpose of regulation should be to raise the level of transparency so traders and investors had knowledge of what they were trading and set prudential standards that would prevent trading losses from affecting the stability of the financial system.
Professor Chan said Hong Kong is a small but very liquid market. The city has succeeded in building a financial market because it is open to international investors and it has committed to building a high quality market with a transparent, high quality regulatory system and a strong financial infrastructure supporting trading and settlement.
“Hong Kong’s policy is welcoming to financial innovations. Our stock exchange has active trading of futures, option and warrant products, with participation of institutions and retail investors,” Professor Chan added, saying that Hong Kong is also a hedge fund hub in Asia.
“In Hong Kong, we know that financial innovations are good because they lead to risk diversification, lower the cost of capital and improve the efficiency of the economy. As an international financial center, we are committed to pursuing a policy that will encourage financial innovations, that will make our market more attractive to both the companies which raise capital in our market and investors who buy products from our market.
“As an economy which has experienced some of the most destabilizing financial crises, like the Asian Financial Crisis, we place great premium on sound regulation and international coordination. It is why we look at the current crisis as an opportunity for international regulators to come together to address some serious weaknesses in our global system.”
Concluding his speech, Professor Chan said that the subprime crisis might spur international cooperation on tackling problems with a global dimension and might ignite a new awareness of just how globalized the economy has become.
Full text of Professor Chan’s speech can be found on the Web site: [http://www.hketony.gov.hk/ny/speeches/speeches08/051208.htm].
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