Financial Crisis Threat or Opportunity Dissertation

Excerpt from Dissertation :

" (2009) Yam states that over the past year the need existed to involve the government more deeply in the banking industry and especially in the area of deposit guarantees and in the supervision of the risk management of banks. Yam states that it is "…gratifying that so many of the tools that we have been able to rely on, including the apparatus and contingency arrangements for ensuring liquidity, have been developed in a pre-emptive rather than a reactive way. On the various emergency measures, I am quite sure that in the fullness of time, these will either be turned into standing arrangements or withdrawn, hopefully through smooth exit strategies. but, current sentiment is clearly demanding much closer regulation and supervision of banks over the longer term." (2009) the form that this will take is stated to be pending in the international forums however Yam states that the thinking thus far "…seems to be towards improvements in the level and quality of banks' capital; new global standards for measuring, managing and supervising liquidity risk; and macro-prudential supervision to reduce the pro-cyclical dynamics of financial markets. No doubt the details will take some time to work out." (2009)

As an international financial centre, Hong Kong must adopt international standards and best practices. We have to move with the times, although that does not of course mean we have to blindly implement everything in an inflexible, straightjacket manner. (Yam, 2009) Hong Kong is stated to be in a good position "to adopt and participate in the various measures now under consideration by the G20, the Financial Stability Board and its Standing Committees and other international agencies." (Yam, 2009) Yam reports that a primary cause of the recent financial crisis was "the use -- or abuse -- of innovation by financial intermediaries for short-term private gain at the expense of longer-term stability and effective working of the financial system as a whole." (2009)

Trends of Hong Kong Banking Industry

Hong Kong's banking sector in the 1990s was characterized by the domestic market structure being highly concentrated and dominated by the HSBC Group. Measures introduced by the Hong Kong Monetary Authority (HKMA) to support the position of Hong Kong as an International Finance Center and to open the foreign banking market. The following measures were introduced by the Hong Kong Monetary Authority (HKMA):

In 2001 it lifted all restrictions on the number of branches that foreign banks could maintain in Hong Kong.

In 2002 it lifted the market entry criteria for foreign banks. Previously, to be considered for a banking license, a foreign bank had to maintain a representative office for 1-2 years in Hong Kong. Foreign banks also had to satisfy the U.S.$16 billion asset size criterion. Recognizing these criteria as impediments to the expansion of its international financial services market, the HKMA dropped the representative office requirement and relaxed the balance sheet size criteria to HK$3 billion for customer deposits and HK$4 billion for total assets.

Overseas banks that do not qualify for a full banking license were allowed to establish Restricted Licensed Banks and Deposit-Taking Companies in order to conduct wholesale and investment banking practices.

Furthermore, a number of liberalization measures have been introduced from time to time under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA). The new measures benefit Hong Kong's banking industry, providing market entry and business expansion opportunities in the Mainland.

The Hong Kong banking industry has experienced growth in the private banking industry and as well is one of the primary world wealth management centers and claims the largest private banking market in Asia experiencing robust growth in the past several years. (, 2010)

III. STRATEGIC MODELS on HK BANKING INDUSTRY

A. PORTER FIVE FORCES

ONE: Existing competitive rivalry between suppliers

Because the Hong Kong banking industry is superior to the majority of banking systems in terms of its stability it is not likely that competitive rivalry is a primary factor at this juncture.

TWO: Threat of new market entrants

Market entry criteria for foreign banks were also relaxed in May 2002. Such, then, was the nature of the more liberal regulatory environment within which Hong Kong's banks operated post-1999, and the banks have been able to engage in renminbi-dominated 'retail' banking operations since January 2004. It is reported that the focus should likely be on that of the interest rate liberalization program and relaxed market entry criteria. There will likely be new entrants in the international banking industry

THREE: Bargaining power of buyers

Buyers will hold great bargaining power in the environment of today's banking industry of Hong Kong and Hong Kong banks just as other banks will be striving to offer their customers what the customers need, want and expect in terms of products and services.

FOUR: Power of suppliers

The government and regulatory environment will play a large role in the offerings of products and services by Hong Kong Banks.

FIVE: Threat of substitute products (including technology change)

Yam (2009) noted in his speech that the role of Hong Kong in serving the need of China in international finance depend on the pace of financial liberalization on the Mainland particularly in the development of the renminibi business. Yam reports that it is out of the hands of the banking industry because involved are policies that allow greater cross border mobility of capital, financial instruments and financial intermediaries. Yet our survival as an international financial centre depends on our being prepared for these policies of financial liberalization." (2009) Yam recommends that the banking industry should be proactive in "…offering advice in policy making and be ready to provide assistance and technical support in policy implementation. One very practical way of doing this is to continue to use our financial system as a platform for cautious experiment in the gradual liberalization of the renmminbi -- a process that is of benefit to our system and to the nation as a whole."

B.

PEST ANALYSIS

Political

Regulatory reform is driven not just by objective circumstances but also by changing public expectations.

Banks are operating in a "more skeptical, more demanding, even hostile environment. (Yam, 2009)

Economic

As an international financial centre, Hong Kong must adopt international standards and best practices. (Yam, 2009)

Social

The social factors that are relevant to the Hong Kong Banking Industry are presently unknown.

Technological

There is discontent and anxiety locally that pre-dates the crisis -- for example, about access to banking services, about the risks of new technology -- that result partly from the changing business landscape and partly from changing expectations. We must expect this trend to continue, and it will be necessary for the banking industry and the regulator to take more and more account of wider public opinion, and to tackle areas of concern. (Yam, 2009)

C.

SWOT ANALYSIS

Strengths

Strong domestic banking market dominated by the HSBC Group that has become a strong international financial institution in its own right.

Growth of foreign banks that was facilitated by a number of initiatives such as lifting restrictions on the number of branches a foreign bank could maintain and lifting restrictions on eligibility criteria for grant of banking licenses to foreign banks.

Regulatory authorization for a wide range of banking services from deposit taking, trade financing, loan syndication to foreign exchange trading.

Strong emergence of the private banking sector due to Hong Kong's strict anti-money laundering provisions, non-discriminatory low tax regime and availability of sophisticated wealth management services. (Janus, 2010)

Provisions of the Hong Kong private banking industry include Standard Charter Bank and HSBC making provision of services across a wide range including:

(1)

Wealth management;

(2)

Investment advisory;

(3)

Low risk asset growth

(4)

Corporate product support

(5)

Estate planning; and (6)

Others. (Janus, 2010)

The strength of Hong Kong's private banking industry is its anti-money laundering laws and generous tax incentives. Other strengths include:

(1) no capital gains tax; and (2) No tax on overseas dividend income. Janus, 2010

Investment banking in Hong Kong ahs experienced growth due to Hong Kong being the commercial capital of Asia. Investment services include:

(1) Issuing securities (underwriting);

(2) Managing portfolios of financial assets;

(3) Trading of securities (stocks and bonds);

(4) Assisting investors purchase securities and providing financial advice and support services.

(5) Assisting investors purchase securities; and (6) Providing financial advice and support services. (Janus, 2010)

The private sector bond market in Hong Kong is reported to be among the largest and most liquid in the Asia-Pacific region. Electronic bond trading platforms result in benefits to institutional and retail investors. Responsible for opening the bond market to foreign participants is the listing of the Pan Asia Bond Index Fund on the Hong Kong stock exchange. (Janus, 2010, paraphrased) the securities and futures market in Hong Kong is reported to be "highly regulated." (Janus, 2010) the types of banks in Hong Kong include…

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