The SAR banking industry is undergoing a major consolidation during which traditional players will move into gaps formed by the scaling down of Japanese and European bank operations in Hong Kong, according to sources. From the beginning of the year, Japanese institutions have been striving to meet domestic capital adequacy requirements by cutting back their exposure overseas. The Japanese cut-backs have been demonstrated by banks 'fire selling' all forms of credit, refusing to roll over revolving credit lines when they mature and demanding borrowers repay loans before maturity. Japanese institutions have, over the past few years, become one of the largest groups of wholesale lenders in Hong Kong with a share of about 15 per cent of Hong Kong's corporate borrowings market. European institutions have also implemented top-level strategies to cut their exposure to Asia after recording heavy loan losses in the region. National Australia Bank general manager Paul Law Fung-yuen confirmed his bank had been looking at investing in papers issued by blue-chip companies sold at large discounts by the Japanese. He said these papers presented an excellent opportunity for multinational banks to access doubled yields without doubling risks. Commonwealth Bank of Australia treasurer Andrew Fung Hau-chung said that the selling flurry was a good opportunity for those institutions which had missed a chance to develop their assets in 1996 and the first half of last year. At that time, loans and debts were issued at razor-thin spreads which discouraged some institutions from participating in order not to squeeze their margins. While bigger players are looking at investing in this kind of 'secondary' credit, smaller banks are trying to take up relationships abandoned by the Japanese and European institutions. Union Bank of Hong Kong managing director David Yau Man-tak said the withdrawal of Japanese and European institutions from the domestic banking scene removed excessive competition and brought margins back to more reasonable levels.