WHEN it comes to full and frank disclosure, none of Hong Kong's banks can be compared to George Washington. But at least Bank of East Asia has revealed the size of its contribution to its inner reserves - 9.5 per cent of profits, in marked contrast to the estimated 35 per cent to 40 per cent Hang Seng Bank puts away for a rainy day. Which level is more typical of Hong Kong banks' attitude toward inner reserves - Hang Seng Bank or Bank of East Asia? Why do banks in the territory have to allocate so much for inner reserves? Is Bank of East Asia putting aside too little, or is Hang Seng Bank putting too much of its money aside in a non-productive vault? With luck, the market will answer some of these questions in the coming weeks when local banks report their results, and their inner reserve policies. The market is short of benchmarks for this right now - the practice of putting money into inner reserves is limited to Singapore, Switzerland and Hong Kong. Of the three, Switzerland and Singapore are synonymous with stability and superb macroeconomic management. Hong Kong is the only one subject to potentially serious sell-offs based on political events. The death of Deng Xiaoping, worries about Chinese stewardship after 1997 and other issues could undermine confidence in Hong Kong's banking system. It will be interesting to see share market reaction over the coming weeks as inner reserve allocations are publicised. Banks whose inner reserves are topped up at what investors see as an appropriate level will presumably be rewarded by higher share prices. They may be rewarded by more deposit accounts. It is, after all, barely three years since Citibank, Standard Chartered and International Bank of Asia were hit by nervous depositors demanding their money back. The sell-off of Bank of East Asia was evidence of investors adjusting the share price to what they saw as a more realistic level. All of Hong Kong's banks which have not yet revealed their inner reserve policies are going to have to run a gauntlet of shareholders in the next two months as well.
