Lessons of the '90s help banks cope
Hong Kong banks have performed better than those in other parts of the world in recent years, largely because of the strength of both the local and, particularly, mainland economies. This is according to Simon Topping, principal of the consulting division and head of financial services regulation for Asia-Pacific at KPMG.
The second reason for the industry's stellar performance is that both banks and the government have been more conservative, having learned the hard way through the Asian financial crisis of the late 1990s.
Topping says that Hong Kong's banking industry is highly competitive, which has driven banks here to continually improve. The Hong Kong Monetary Authority, meanwhile, is regarded as a "pretty good regulator" of the industry.
"The Hong Kong banking industry has performed remarkably well through the recent global financial crisis," Topping says. "We haven't had banks failing. We have not had banks having to resort to public support the way we've had in Europe or the United States."
Even though Hong Kong's banking industry has performed better than other parts of the world, it has suffered from a certain "guilt by association".
"The reputation of banking globally is not as good as it was a few years ago," Topping says. "So to some extent, the banking industry in Hong Kong has been affected by a sort of global malaise toward banks."
Within this generally sanguine scenario, there have been minor hiccups which were quickly sorted out.
"The only real missteps the banking industry in Hong Kong has experienced in recent years has been the mis-selling of investment products, which the industry itself and regulators have taken steps to put right," Topping says.
Will Hong Kong's banking industry become a victim of its own success? One of the major challenges facing the industry is that Hong Kong is increasingly seen as one of the few places in the world where banks can still make money and continue to grow.
"If everyone wants to come to Hong Kong, the banking industry here will become ultra-competitive," Topping says. "Not only that, many of the banks are morphing into Hong Kong-China banks, and this raises both risk and governance issues."
Other challenges facing the industry can be divided into three broad categories. "The first group is prudential measures, which would be increased capital and liquidity requirements," Topping says. "The second is conduct issues surrounding how banks relate to clients and customers. The third is systemic risk issues, which would be how banks structure their operations to make them more resilient in times of stress."
He says that banks are reacting to the global regulatory changes now taking place in different ways, depending on whether they are local, foreign or originate from the mainland.