Several people have asked why this column has spent so much time over the last couple of weeks looking at the Cypriot banking crisis.
At just 0.2 per cent of the euro zone's gross domestic product, they argue that Cyprus is unimportant to Europe and irrelevant to Hong Kong. Who cares if a few dodgy Russian oligarchs take a haircut on their offshore deposits?
But there are two good reasons why Cyprus should matter to us.
For one thing, in an age when an increase in perceived risk in one part of the world sends investors scurrying to scale back their exposure to other regions, what happens in Cyprus can have a big impact on Hong Kong asset prices.
We saw that two weeks ago, when the Hang Seng Index shed 2 per cent in a single day in response to the European authorities' ill-conceived first attempt to tax Cypriot bank deposits.
But contagion is only part of the reason we should watch events in Cyprus closely.
As a smallish place with a fixed exchange rate regime, its monetary policy dictated by a distant central bank, and a banking sector many times the size of its economy - a banking sector, moreover, that largely serves another, third-party, economy - crisis-hit Cyprus bears more than just a passing resemblance to Hong Kong.
So it makes sense to look at the Cypriot crisis and ask if the same could happen here, especially given Hong Kong's long history of bank runs, failures and crises.
It's only four and a half years since thousands of depositors besieged local branches of Bank of East Asia, clamouring to withdraw their cash in the belief that Hong Kong's third-biggest bank was about to collapse.
In 1991 the closure of BCCI Hong Kong triggered runs on local branches of Citibank and Standard Chartered, with depositors withdrawing more than HK$2 billion in one night.
The early 1980s saw seven bank failures in four years. Even more severe was the panic of 1965. Three banks collapsed entirely, with six more - including Hang Seng, then Hong Kong's second-biggest bank - rescued at the last minute. The economic slump that followed lasted three years.
Admittedly, at first glance, the chances of a Cyprus-style recurrence seem slim. Whereas Cypriot bank deposits ballooned to 700 per cent of the island's gross domestic product, in Hong Kong the figure is only 400 per cent (see the first chart).
On top of that, Cypriot banks lost heavily on their investments in Greek government bonds. In comparison, the asset side of the Hong Kong banking system's balance sheet appears in robust health.
Look more closely, however, and there are reasons to be vigilant. Hong Kong's GDP is inflated by the 16 per cent it miraculously adds to goods passing through the city's port and airport. Strip that out, and bank deposits climb to 530 per cent, more than in Cyprus on the eve of the global financial crisis in 2007.
There are vulnerabilities on the asset side, too. As Hong Kong's property market has soared, so has the banking system's exposure to the real estate sector, with property-related loans climbing from just over 70 per cent of GDP in 2006 to 90 per cent last year.
That's not the only danger. Over the last few years Hong Kong bank lending to the mainland has jumped, with loans for use outside the city (including trade finance) rising from 33 per cent of GDP to 97 per cent (see the second chart).
Credit rating agencies, the Hong Kong Monetary Authority, and the International Monetary Fund have all warned that either a slump in local property prices or a slowdown in the Chinese economy could inflict severe damage on Hong Kong banks' asset quality and balance sheets.
That doesn't mean a crisis is likely, or even imminent. But it does mean Hong Kong should pay careful attention to events in Cyprus. What happened there could just happen here too.Topics: Cyprus Banking in Hong Kong