Integrating Financial Supervisory Agencies Key Challenges for the Southeast Asia Economies Stephen Y.L. Cheung City University of Hong Kong

2 Arguments in Favor  Facilitates the supervision of financial conglomerates.  Allows better monitoring of issues affecting the entire financial system, as well as rapid policy responses.  Reduces regulatory arbitrage.  Strengthens accountability of supervisors.  Maximizes economies of scale.

3 Arguments Against  Low supervisory effectiveness during transition period.  Other schemes to achieve prompt information in sharing and collaboration among existing agencies.  May only work in certain countries.  Gains in terms of economies of scale may not be significant.

4 Asian Crisis: Hong Kong’s Experience  Double-play strategies Short position in Hong Kong Dollar Short position in Hong Kong Dollar Short position in Future contracts of Hang Seng Index Short position in Future contracts of Hang Seng Index  Known hedge funds (a few) built up 49% of the total market position in Aug 98.  HK government spent HK 120 billion in buying 10% of the major stocks in Aug 98.

5 Lessons (I)  Financial market has become very complex.  Fragmented market and overlapping regulators. Currency market, mainly concentrated in the banking sector, Hong Kong Monetary Authority. Currency market, mainly concentrated in the banking sector, Hong Kong Monetary Authority. Futures market, first-line regulator Hong Kong Futures Exchange and second-line regulator Securities and Futures Commission. Futures market, first-line regulator Hong Kong Futures Exchange and second-line regulator Securities and Futures Commission.

6 Lessons (III)  Hong Kong Futures Exchange did not make any attempts to reduce Fund’s position.  SFC did not make any attempt to obtain information from the market.

7 Lessons (II) Before August 1998  Government did not have a clear picture in the Hong Kong Futures Market and there was an obvious problem of concentration risk.  That was not the major concern of Hong Kong Futures Exchange. Its major concern is the default risk of its member firms. NOT the SYSTEMATIC RISK.

8 Aftermath  A joint committee was formed between major institutions, regulators, and government officials.  Weekly meeting (in 1999).  A joint report on the activities of the financial market including currency, equity and derivatives markets.  Market intervention could have been avoided???

9 What should be done?  More coordination.  Less political struggle.  Information sharing.  KNOW and LEARN the market.

10 Simple solution = Putting them together?  Culture difference.  Take time to integrate.  Worse than the private sector.

11 Problems  Low enforcement.  Check and balance.  A recent paper by la Porta, Lopez de Silanes, and Zamarripa on Related lending. Related lending accounted 20% of the commercial loan in Mexico with 4% lower interest rates (than arm-length lending), 33% more likely to default and lower (30%) recovery rate.

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

13 ~END~