Integrating Financial Supervisory Integrating Financial Supervisory AgenciesAgencies

Key Challenges for the Southeast Key Challenges for the Southeast Asia EconomiesAsia Economies

Stephen Y.L. CheungStephen Y.L. Cheung

City University of Hong KongCity University of Hong Kong

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Arguments in FavorArguments in Favor

Facilitates the supervision of financial Facilitates the supervision of financial conglomerates.conglomerates.

Allows better monitoring of issues affecting Allows better monitoring of issues affecting the entire financial system, as well as the entire financial system, as well as rapid policy responses.rapid policy responses.

Reduces regulatory arbitrage.Reduces regulatory arbitrage. Strengthens accountability of supervisors.Strengthens accountability of supervisors. Maximizes economies of scale.Maximizes economies of scale.

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Arguments AgainstArguments Against

Low supervisory effectiveness during Low supervisory effectiveness during transition period.transition period.

Other schemes to achieve prompt Other schemes to achieve prompt information in sharing and collaboration information in sharing and collaboration among existing agencies.among existing agencies.

May only work in certain countries.May only work in certain countries. Gains in terms of economies of scale may Gains in terms of economies of scale may

not be significant.not be significant.

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Asian Crisis: Asian Crisis: Hong Kong’s ExperienceHong Kong’s Experience

Double-play strategiesDouble-play strategies Short position in Hong Kong DollarShort position in Hong Kong Dollar Short position in Future contracts of Hang SenShort position in Future contracts of Hang Sen

g Indexg Index Known hedge funds (a few) built up 49% oKnown hedge funds (a few) built up 49% o

f the total market position in Aug 98.f the total market position in Aug 98. HK government spent HK 120 billion in buHK government spent HK 120 billion in bu

ying 10% of the major stocks in Aug 98.ying 10% of the major stocks in Aug 98.

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Lessons (I)Lessons (I) Financial market has become very Financial market has become very

complex.complex. Fragmented market and overlapping Fragmented market and overlapping

regulators.regulators. Currency market, mainly concentrated in the Currency market, mainly concentrated in the

banking sector, Hong Kong Monetary banking sector, Hong Kong Monetary Authority.Authority.

Futures market, first-line regulator Hong Kong Futures market, first-line regulator Hong Kong Futures Exchange and second-line regulator Futures Exchange and second-line regulator Securities and Futures Commission.Securities and Futures Commission.

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Lessons (III)Lessons (III)

Hong Kong Futures Exchange did not Hong Kong Futures Exchange did not make any attempts to reduce Fund’s make any attempts to reduce Fund’s position.position.

SFC did not make any attempt to obtain SFC did not make any attempt to obtain information from the market.information from the market.

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Lessons (II)Lessons (II)Before August 1998Before August 1998 Government did not have a clear picture in Government did not have a clear picture in

the Hong Kong Futures Market and there the Hong Kong Futures Market and there was an obvious problem of concentration was an obvious problem of concentration risk.risk.

That was not the major concern of Hong That was not the major concern of Hong Kong Futures Exchange. Its major concern Kong Futures Exchange. Its major concern is the default risk of its member firms. NOT is the default risk of its member firms. NOT the SYSTEMATIC RISK.the SYSTEMATIC RISK.

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AftermathAftermath

A joint committee was formed between A joint committee was formed between major institutions, regulators, and major institutions, regulators, and government officials.government officials.

Weekly meeting (in 1999).Weekly meeting (in 1999). A joint report on the activities of the A joint report on the activities of the

financial market including currency, equity financial market including currency, equity and derivatives markets.and derivatives markets.

Market intervention could have been Market intervention could have been avoided???avoided???

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What should be done?What should be done?

More coordination.More coordination.

Less political struggle.Less political struggle.

Information sharing.Information sharing.

KNOW and LEARN the market.KNOW and LEARN the market.

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Simple solution = Putting them together?Simple solution = Putting them together?

Culture difference.Culture difference.

Take time to integrate.Take time to integrate.

Worse than the private sector.Worse than the private sector.

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ProblemsProblems Low enforcement.Low enforcement. Check and balance.Check and balance. A recent paper by la Porta, Lopez de SilanA recent paper by la Porta, Lopez de Silan

es, and Zamarripa on Related lending. Reles, and Zamarripa on Related lending. Related lending accounted 20% of the commeated lending accounted 20% of the commercial loan in Mexico with 4% lower interest rcial loan in Mexico with 4% lower interest rates (than arm-length lending), 33% more rates (than arm-length lending), 33% more likely to default and lower (30%) recovery rlikely to default and lower (30%) recovery rate.ate.

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Regulator is only one part of the market. Regulator is only one part of the market. Other parts include listed companies, Other parts include listed companies, financial intermediaries, such as analysts, financial intermediaries, such as analysts, auditors, accountants, and lawyers. auditors, accountants, and lawyers.

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