ON the same day Hongkong Bank announced a 24 per cent increase in its profits for 1992-93, the Consumer Council released a report on the Interest Rate Agreement governing small or short maturity deposits.
The report claims the cartel-like agreement has created a monopsonistic market for small deposits. By comparing the spread between the bank's lending and borrowing rates in Hong Kong with those in other countries, the report concludes Hong Kong banks areextracting a monopsonistic rent of about $5 billion a year from the pockets of small depositors who are ''mainly the young, the old, and the poor''.
To allow the free competition necessary for the protection of consumers' interests, the Consumer Council proposes a phased elimination of the interest rate cartel over the next three years.
The Hong Kong Association of Banks (HKAB), not surprisingly, disagrees strongly with the Consumer Council's reasoning and proposals. The association contends that, instead of costing consumers a heavy monopsonistic rent, the agreement creates a stable environment in which banks actually subsidise depositors by about $4 billion a year. The HKAB claims that in the absence of any agreement on deposit rates, a cutthroat competition among banks would ensue, destabilising the banking community, threatening the industry's profit margins and eventually driving some small banks to insolvency.
If one bank went under, the ripple effect would extend to every corner of the banking community, sending shock waves through the entire economy.
So which side is telling the truth? Would the introduction of competition through deregulation of deposit rates offer better protection for consumers' interests, or would it affect the banking industry so adversely that the general public would suffer inthe end? It is a general rule that market competition is an effective way to protect customers, and as the Consumer Council points out, there has been a steady increase of complaints about banking services in Hong Kong. However, the public should not be over-excited that the council's proposal will lead to a drastic rise in savings rates.
Movements in interest rates are influenced by the interplay of the forces of supply and demand. The abolition of the agreement would trigger a massive increase in deposit rates only if there was a pent-up hunger for funds among the banks in Hong Kong.