Apart from the herd
In the 1980s, many of the world's leading banks were hammered by the Latin American crisis, having failed to appreciate that sovereign governments were just as likely as anyone else, if not more so, to renege on their debts. In the Asian crisis of the 1990s, banks were hit by their failure to recognise weak economic fundamentals and the damage that foreign exchange risk could inflict.
Today, in the so-called subprime crisis, they have simply lent too much to people who were clearly going to have difficulty repaying once the economy entered more troubled waters - as it has in the United States. Is there no end to banks' capacity to shoot themselves in the foot?
Another mistake by some banks was to think that the potential subprime problem could be avoided by hiving off dodgy mortgages into subsidiaries - so-called special investment vehicles. But, when the crunch came and these vehicles ran into difficulties, the parent banks felt obliged to bail them out, for fear of the reputational damage they would suffer if they allowed their proteges to fail, not to mention the adverse knock-on effect if there had to be a forced sale of those mortgage portfolios.
As a result of all this, we have seen such illustrious names as Citigroup, Merrill Lynch, UBS, Barclays and Morgan Stanley turning to private investors and government funds in Asia and the Middle East for new injections of capital.
Historically, part of the banks' problem has been their herd instincts. If one bank pursues some new gimmick and starts profiting from it, few others can resist the temptation to join in. After all, if you miss the boat and so miss out on profits that all others are enjoying, you stand out as a failure. Your shareholders will not be pleased and, if you have been directly involved yourself, you will probably lose your job. But if the whole business area goes pear-shaped, other banks will share the grief with you. There's safety in numbers. Even if you lose your bonus or your job, you, and the shareholders, can find some consolation in being no worse off than the others who had joined in, too.
Fortunately, Hong Kong banks have largely avoided any sort of subprime crisis, because of limited international exposure in the key area of US housing. True, the London-based HSBC group has been affected through its US operations, with it share price dragged down by the general malaise affecting banks, but HSBC in Hong Kong is scarcely to blame. There is no bank here (so far as one knows!) which, through excessive mortgage lending, has got into a mess of the scale which has mired Northern Rock in England.
This happy circumstance is helped by the conservative rules that the Monetary Authority applies on mortgage lending. There have been complaints about these from time to time, especially at the bottom of the property cycle.
But they do ensure that, if or when a serious property downturn does take hold in Hong Kong, the banks are reasonably well placed to weather it.
Moreover, the government-owned Mortgage Corporation, despite being a contradiction of non-interventionist principles in most of what it does, provides a ready-made framework for supplying banks with liquidity against their mortgage books if the need should ever arise - if necessary, on less-stringent terms than the marketplace would demand.
It is ironic that, despite a decade of hugely time-consuming efforts by the world's banking regulators (with our own Monetary Authority among the most committed) to produce the elaborate new rule book known as 'Basel II', some of the world's mightiest banks (and a few of the less mighty) have been dragged under.
This has happened not because of a misunderstanding of sophisticated banking procedures, or overindulgence in complex financial engineering, but by simple disregard for the basic, old-fashioned principle of sound banking. Namely, that you don't lend to people who are unlikely to be able to repay.
Tony Latter is a senior research fellow of the HK Institute of Economics and Business Strategy
