The Hong Kong Monetary Authority yesterday presented a package of policies to encourage greater participation from foreign banks and place more pressure on local players. It said the package was a response to recommendations by KPMG in the Banking Sector Consultancy Study commissioned by the monetary authority in September 1997. The most important aspect - the further deregulation of deposit interest rates from mid-2000 - will set the stage for a new pattern of banking sector competition. Deputy Chief Executive David Carse said further deregulation would remove the 'cross-subsidisation' of small depositors at banks by large ones, allowing customers with bigger accounts to receive higher returns. The move would 'help improve allocation of resources in the economy', he said. 'It needs to be understood there will be both winners and losers among the bank customers,' he added Mr Carse said some banks might see higher funding costs after the deregulation, and some might try to recover part of these expenses by charging customers more. 'Don't be surprised if more transaction fees are introduced,' he said. He predicted deregulation would provide stimulus for banks to develop more savings products. 'It will provide more incentives for banks to look particularly to the liability side of their balance sheets.' Mr Carse said banks might also pass on the extra costs of funds to borrowers. 'Borrowers may find they will be charged a higher rate of interest than previously and also interest rates will likely be more volatile than they have been in the past.' KPMG had forecast a 49 basis-point reduction in banks' net interest margin in a worst case scenario after deregulation, but Mr Carse said the monetary authority believed the squeeze in margin would be a much smaller 17 basis points. The monetary authority believes deregulation, which allows banks to compete on the pricing front rather than on the size of their branch network, will increase pricing transparency and lower the cost of financial intermediation. Mr Carse said the monetary authority would monitor some 'common sense' indicators to tell if mid-2000 would be a good time to start the move. Among the indicators were whether Hong Kong would have two successive quarters of positive economic growth by that time, the difference between domestic and United States interest rates, bad debt in the sector and the external environment. The package also relaxed the one-branch policy for foreign banks licensed after 1978. It would allow them to open up to three branches in the second half this year. Hong Kong has 37 multi-branch banking licences. Under the new policy, another 98 banks would be allowed to open more branches. The monetary authority would look at the impact of this move and would consider full deregulation in 2001. Mr Carse said the package could increase the competitive pressure on some banks, forcing them to consider mergers or some other forms of co-operation. 'But we have been neutral on this. It's up to the market to decide to consolidate or not. We are just altering some of the ground rules which may influence on that commercial decision.' The monetary authority also aims to simplify its three-tier licensing system - comprising full licence banks, restricted licence banks and deposit-taking companies - to two tiers, but not before 2001. It will also commission studies early next year in an effort to enhance depositor protection. Mr Carse said the monetary authority would consider deposit insurance schemes as a way of enhancing protection. The monetary authority will also study the feasibility of setting up a public credit register for commercial enterprises in early next year. Such a register compiles timely information on relatively large borrowings by companies or other non-bank enterprises from the banking system. This information is then fed back into the banking system, and this helps to prevent individual borrowers from taking on excessive levels of debt.