Like most organisations, the Hong Kong Monetary Authority (HKMA) sets time aside each year December for a thorough review of events and activities over the previous 12 months and to set out key priorities for the year ahead.
In their case, one thing is certain: there is never a shortage of topics. And with developments in financial markets, the international landscape and the world of technology sure to continue apace, all the signs point to a coming period of more than a little uncertainty.
“Our priorities keep changing all the time, simply because it is very difficult to foresee what will happen in 2017,” says Arthur Yuen, deputy chief executive of the HKMA. “All banking supervisors, though, are always concerned about credit risk, and that will remain a key focus, as has been the case for a few years now.”
More specifically, banks operating in Hong Kong have been told to “brace themselves” for a turn in the credit cycle. At the moment, the classified loan ratio is at only 0.8 per cent, which is very low by historical standards. But The HKMA is watching the progression closely, hoping that actions taken in the past few years for better credit management will be sufficient to contain the risk in asset quality.
“If we see the [classified loan ratio] growing faster than average, that is obviously a cause for concern,” Yuen says. “To counter that, the first step is to insist local banks uphold underwriting standards. And while Hong Kong provides a convenient platform for mainland institutions trying to diversify and expand their operations in overseas markets, we must keep a close eye on the credit risk involved too.”
In parallel, banks have also been reminded to pay due attention to liquidity risk. Early in 2016, that came as a warning that banks should not discount any scenario relating to Brexit and to draw up differing plans accordingly. More recently, the same general advice pertains to the perhaps greater uncertainties now resulting from the outcome of November’s US presidential election.
“We tell banks to not just look at scenarios that they think would likely occur. They should consider also the ‘what ifs’ of a change in liquidity condition in emerging markets.”
Another issue of rising concern sure to be at or near the top of the agenda in the coming year is cybersecurity. During 2015, 17 credible DDoS (distributed denial of service) “attacks” on the banking system were reported to the HKMA, and the number of attempts continues to rise. So far, none has succeeded, but with modes of attack liable to change quickly and new threats emerging all the time, it is essential for banks to remain on high alert.
DDoS, or Distributed Denial of Service in full, is not hacking in the strictest sense, but sees the “bad guys” hi-jack a number of computers by planting “trojans” and viruses to start a synchronised attack on a bank’s website and overwhelm it.
“Touch wood, Hong Kong is not yet a major target, but the intensity of cyberattacks is definitely increasing,” Yuen says. “We do lose sleep over this because with cybersecurity you never feel 100 per cent sure and, in some ways, can only play catch-up.”
One move, though, has been to set up a secured platform to let banks monitor the latest modus operandi of cyber criminals and “chat” on the internet about institutions which may be at risk of attack – and to share that intelligence as necessary. The platform should become fully operational in the near future, and banks will be required to use it.
With that will come other developments: training for relevant staff in line with an approved qualifications framework and a programme for banks to “risk profile” themselves in a structured way.
“We have consulted the industry, and the planning work is nearly complete,” Yuen says. “In other respects, we are looking at how the banks can use technology to enhance the customer experience, whether in providing more user-friendly interfaces or developing new types of service.”
Increasingly, these come under the broad heading of fintech. To encourage the testing of ideas and initiatives, the HKMA has set up a supervisory “sandbox”, facilitating a practical trial-and-error approach. In this way, banks can try out the possibilities of, say, biometrics in a suitably controlled environment with a limited number of test subjects or customers, without achieving full compliance with HKMA’s requirements. For example, removing the usual need to get a third-party endorsement can speed up a process that might otherwise take months.
“There have not yet been any ‘change the world’ blockchain types of thing going through our sandbox,” Yuen says. “But we are now talking to four or five banks about sandbox projects and they see this as a useful way to test out technology solutions in the local market before gaining final regulatory approval.”
Clearly, some fintech initiatives, such as peer-to-peer lending, payment systems and equity-based financing, may be regarded as developing outside the banking sector. However, the HKMA already grants licences for stored value facilities and regulates them. Close monitoring is envisaged for other newer services.
“We need a system of ring-fencing to make sure these finance companies cannot just take the clients’ money and run,” Yuen says. “No one is sure how fast this kind of peer-to peer business will grow in Hong Kong, but despite what people may say, we are ramping up efforts in developing innovative solutions or putting in the necessary regulatory regimes. Also, we stand ready to adjust our policy stance if the rules mean it is not possible to do something worthwhile.”
Regarding two other issues – account opening, especially for SMEs and foreign-owned enterprises, and anti-money laundering (AML) – Yuen is reasonably confident that measures taken in recent months will ultimately have the desired result.
Using cases and experience identified with some chambers of commerce, discussions took place with relevant banks to clear up what information is actually needed to open an account, the expected timelines, and the process for providing regular updates. There should also now be a clear mechanism for the customer to escalate the matter if an application for opening an account is rejected.
In addition, the HKMA has emphasised that AML checks are not one-size-fits-all and should not lead to financial exclusion of some parts of the economy. “Banks must know where to draw the line between AML and a risk-based assessment of the customer’s profile and likely business transactions. The key is to be proportionate and be reasonable.”
On a more personal note, Yuen has just marked 20 years with the HKMA, something he never imagined when first offered the chance to move into regulation and supervision. Indeed, his earliest foray into the banking sector was none too auspicious. It lasted a mere 21 days, as a graduate trainee with a commercial bank in Hong Kong, before he opted instead to accept an offer to join the government as an administrative officer, or AO, in 1986.
Over the next eight years, he took on a diverse series of roles in district offices, with the police, and in the survey office for constitutional changes, collecting public opinion on the future direction of Hong Kong. A subsequent stint in the then Monetary Affairs Branch provided an introduction to the securities business, which he found fascinating. So, in 1995, when an opportunity came to join the SFC, it proved a relatively easy choice. A year or so later, the HKMA was in search of an appointee to work on market development. It was a logical move, so Yuen answered the call.
“The work involves all kinds of challenges, but in some ways banking supervision is also a thankless task,” he says. “Essentially, our role is to keep banks safe and sound. If you do it well, you are simply doing your job. But you only need one bank to get into trouble for people to criticise the HKMA for not doing the job diligently enough.”
Building Benchmarks
The right qualifications matter, particularly in an industry where regulations are tightening and relatively junior employees have to be trusted with significant responsibilities. Therefore, The Hong Kong Institute of Bankers (HKIB) has taken the lead in creating a structured framework of qualifications to ensure individuals have the know-how and expertise needed to build a successful career in the sector.
“There are many lessons we can learn from the global financial crisis,” says Arthur Yuen, Deputy Chief Executive of the Hong Kong Monetary Authority (HKMA). “One of the most important is that banks are only as strong as the quality of people working there.”
In particular, he notes, bankers are not licensed, as happens in brokerage firms where employees can also be held individually responsible for their actions. And there is little doubt that the banking sector would benefit from having a better defined model, with standardised benchmarks to gauge achievements and career progress.
“That’s why we started the journey with the HKIB – who are best positioned to do this – to make sure there is a way of measuring the expertise of bank staff,” Yuen says. “You need that before you can talk about individual responsibility and how to hold people accountable.”
The agreed way forward is to build on the Enhanced Competency Framework, or ECF. This can be done by enhancing qualification benchmarks covering areas such as private and retail wealth management and anti-money laundering, and introducing new required courses on topics such as credit risk management for both retail and corporate, treasury management, foreign exchange transactions, and general risk management and compliance.
“The HKIB will have to create modules and determine benchmarks for things like credit risk management,” Yuen says. “The ECF is going to provide building blocks and, in due course, a bridge to the new qualification named Certified Banker or CB, to be launched on January 1, 2017. This will not only help bank staff measure their expertise and progress in the banking world, but also show the public that this is a properly regulated profession. Banking is a profession, not just a job!”
This article originally appeared in the January-February 2017 issue of Banking Today, the official journal of The Hong Kong Institute of Bankers.
This article appeared in the Classified Post print edition as Sustaining stability.
