A GAP OF understanding tends to arise for some people when you stick the word 'bank' on what are actually glorified pawn shops. You may find, for instance, that international consultancy studies say your 'banks' are not particularly good at 'risk exposure offsets' and perform poorly in 'derivative and interest rate hedging techniques'. But when they say this about Hong Kong banks, as a study on risk management by Deloitte Touche Tohmatsu did the other day, then there is one obvious thing to do. Point these people to the chart below. It shows the quarterly bad debt charge Hong Kong banks make is now down to 0.2 per cent of their total assets. In the United States, that home of fancy risk exposure offsets and modern hedging techniques, the comparable bank charge-off rate is more than four times as high at 0.84 per cent. Glory be to glorified pawn shops. When run on proper pawn shop principles, and in Hong Kong they mostly are, they do a magnificent job of keeping loan losses to an absolute minimum. Want a loan, friend? Give me a prior charge on a piece of saleable property worth at least double the value of the loan and the money is yours. Forget to pay me back and I will sell that property to one of my friends at the outstanding value of the loan. He will then sell it at its full value to someone else and he and I will split this extra profit. Are you still thinking of not paying me back? But this time-tested way of keeping banks financially sound, the one that has given us the soundest banking system in Asia, is scorned by modern professionals. The Deloitte study says our banks excel in risk and control information but are poor at putting this information to work. The fact is they excel at risk and control information because they are essentially community banks. They deal with people they know. They are also very good at putting that knowledge to work in the traditional way of 'John over there, he's good for his money but let's be a little careful with Joe.' It is unfortunate this sort of information cannot be programmed into a computer very well and is therefore not valued by consultants as much as it should be. And the danger here is that the Hong Kong Monetary Authority will swing to their way of looking at things and start talking derivative hedging too. Modern times, you know. They love to ape foreign financial fashions down at the HKMA. This is a particular danger at the moment because the Bank for International Settlements, which sets worldwide standards in how much capital banks should maintain for any given level of assets, wants to get fancier about how these capital adequacy standards are defined and has given property no place as collateral in its most recent proposals. This is tantamount to telling pawn shops they may not take in watches and jewellery for the money they advance but must instead write interest rate swaps with other pawn shops to cover their risk. Property as collateral has served our banking system well. It fits with the nature of our banks, it has kept bad debt charges down, it represents the financial system to which our community is adapted and we would be ill-served if we abandon it for Deloitte-style derivatives. Graphic: jake26gbz
