EFFECTIVE BANK regulation might be all about balance sheets and capital ratios but it also helps to have a good nose. Having spent 35 years monitoring the purveyors of credit, William Ryback, the Hong Kong Monetary Authority's recently installed deputy chief executive, reckons he is a pretty good sniffer of problems in the making and uses a simple rule of thumb - count the number of talking heads in the board room. Recalling one visit to a United States bank in the grim days of the early 1990s bust which brought many financial institutions to their knees, he said: 'I walked into a room full of board members yet only heard one voice and that was the president. Right then, I felt this bank would collapse within two years.' That prediction proved correct and the bank was one of 1,500 bank failures in the late 1980s and early 90s stemming from a credit boom and the Latin American debt crisis. Speaking from his 88th-floor office overlooking Hong Kong's finance industry, the veteran regulator reckons little has fundamentally changed about the business of watching over banks. 'I have good instinct as to whether people are lying and if a bank has a problem,' Mr Ryback said. That process of detection apparently starts with the basic governance principles. 'When a bank president has too big an ego and other board members dare not to say anything, it is going to have major management problems,' he said. The fallout from the latest US corporate scandals has focused regulators' attention on over-powerful chief executives and the need to create more balanced and accountable boards. Hong Kong's tightly managed family-controlled banks and big firms have avoided catastrophic failure in recent years, but the issue of over-powerful chairmen remains a live topic. 'It is much better to have four to five people debate on policy. Many banks in the US died due to arrogant management,' he said. Taking over from the highly regarded David Carse last August, Mr Ryback became the first US banking regulator in Hong Kong, breaking the mould of Bank of England supervisors being sent out to the territory. The switch, he reckons, has been a natural evolution since Hong Kong has ceased to be British, having adopted a mix of banking regulatory methods from both Washington and London. US supervision has traditionally relied upon audits and on-site visits, which meant that regulators rarely deviated from the hard numbers. By contrast, the British style relied on a network of 'informers' revealing instances of misconduct or trouble swept under the carpet. 'Over the years, an understanding has developed that you have to have both methods,' he said. Coming from a 17-year career at the US Federal Reserve, where he oversaw banking supervision, to his $5.5 million-a-year position in Hong Kong leaves him especially well placed to muse over the regulators' changed role - one that has shifted from 'counting every penny' to a focus on asset quality. 'Of course a bank fails because of failed loans but now, we also need to check on their risk management and their investment portfolio, seeing how they invest their money and how they manage to earn returns.' Globally, the trend has been towards ever greater banking concentration, with merger activity in the US reducing its highly fragmented industry from 14,000 institutions over the past 30 years. Hong Kong's arguably overcrowded banking sector may have inched only slowly towards consolidation, but that is likely to change, he reckons. 'It is inevitable that banks will seek merger and acquisition activity due to the need to combine resources and develop technology platforms capable of capturing business opportunities under Cepa,' he said. Hong Kong's free-trade deal with the mainland - the closer economic partnership arrangement - may have proved a damp squib thus far but the promise of accelerating entry to China's slowly opening domestic banking market has focused minds. Among big players, Standard Chartered Bank and Citibank have applied for local registration, qualifying them for quicker and deeper market entry. His hope is that those banks under his charge capitalise on the ability to conduct yuan business - taking deposits and making remittances - to the benefit of shareholders who have invested in institutions awash with deposits but scant profitable lending opportunities. In a departure perhaps from the language of the ever-cautious Mr Carse, his hope was that they do not 'screw things up', prompting the kind of clean-up that he oversaw in the United States. That recollection seems deeply etched. 'We had to work 12 hours a days, seven days a week for three years. In the end we closed 1,500 [banks] in five years,' Mr Ryback said. Coming to Hong Kong for Mr Ryback seemed a matter of convenience. 'My wife did not like the idea of me retiring. I do not play golf and there is no bridge club in Washington I can go to. I had to find a job and I couldn't think of a place better than Hong Kong.' Having met most of the chief executives at 140 local banks, he is impressed, believing the level of service on offer surpasses that at most US banks. Next on his agenda is launching the contentious deposit insurance protection scheme to be introduced next year as well as the drawn-out process of introducing the Basle Two agreement that sets new guidelines for tiering banks' risk capital. Navigating policy debates is, however, likely to involve a very different approach to that back home. 'It is difficult to collect opinions from Hong Kong bankers on public policy as they do not like to speak up whereas in the US, everybody likes to speak their mind.' Biography William Ryback, 58, deputy chief executive of the HKMA since August, was in charge of banking supervision for the US Federal Reserve for 17 years. Before coming to Hong Kong, he was chairman of the Association of Supervisors of Banks of the Americas, whose members include the heads of bank supervision for 35 countries. Before joining the board, he worked at the US Office of the Comptroller of the Currency. He is married with two children.