Banking cartel is unjustifiable

PUBLISHED : Sunday, 06 March, 1994, 12:00am
UPDATED : Sunday, 06 March, 1994, 12:00am

THE release of the Consumer Council's report bares few startling conclusions for anybody who has spent even the shortest time looking at the local banking cartel.

What it does is provide empirical backing to an argument which could always be knocked back by the seemingly omnipotent force of the banking and Government establishment.

For change to occur, the intellectual argument must first be won and the report provides a reference point from which that can be conducted.

Praise is deserved for the clear way in which its compilers delineate the issues that must be tackled.

For too long the Hong Kong Association of Banks (HKAB) has managed to muddle the argument by linking a simple question (why should depositors be paid below market rates of interest?) to the much larger issues of banking and macro-economic stability.

Despite the power of the opposition, what the reformers have on their side is the integrity and logic of their argument. The current system, which is glued together by the interest rate agreement, is indeed a cartel and that sits oddly with an economy which in most other categories is a paradigm of free competition.

The arguments that HKAB will make when it responds to the report tomorrow will be erudite and elegantly delivered, but are unlikely to shed much light on the situation.

They will rest on a premise that people in Hong Kong receive good service from their banks and, to borrow an adage, ''If it ain't broke don't fix it''.

They do receive good service, but the fact that small depositors - who by definition are the ordinary people of Hong Kong - have to subsidise that service by giving up to the banks what amounts to a de facto tax is wrong.

If we hold to the belief that the market is the best mechanism for allocating profits in an economy, why should the banks operate in a system which has them deciding the return they will earn on their retail business? Even with allowance for their aristocratic instinct, why, after all, should they perpetuate a system which is not in their interest? It should not be forgotten that first and foremost they are profit-making institutions and, according to the report, they have been earning what amounts to monopoly profits on the retail portion of their deposits.

The Hong Kong consumer can take no comfort from the fact that it is helping to prop up the earnings of what is a very conservatively-managed banking group. Both Hang Seng and Hongkong Bank, which account for over 85 per cent of retail banking, have loan to deposit ratios much lower than the international average, so if they have to work a little harder in managing their assets, rather than relying on their retail lending spreads, so be it.

As Hong Kong becomes ever more a modern consumer society, arguments for suppressing those rights in favour of the corporate good carry less credence.

It is important, as the debate continues, to refute any linkage the banks may make between their ''reasonable profits'' and the question of how retail consumers are treated.

The banks' profits, whether good or bad, are a matter for their shareholders, whereas the issue of properly determined interest rates is one for the Government, which is supposed to regulate the system that allows those banks to earn a living.