THE pleadings offered by the Hong Kong Association of Banks (HKAB) in opposition to the Consumer Council's recommendation to phase out the Interest Rate Agreement (IRA) are primarily built around the logic that fierce interest rate competition may lead toa number of ugly scenes. The HKAB has suggested, for example, that deposit rate hikes in a competition for funds may upset the peg of the Hong Kong dollar to US currency. Another possible consequence of abolishing the IRA is that small deposit accounts, which the HKAB claims aremoney losers, will be abandoned by banks in their struggle to survive competition. Moreover, to make up for higher deposit rates, banks will be forced to charge new fees. Therefore the attempt to remove the cartel in order to protect the interests of the consumers will backfire. I have argued in an earlier article in this column that the Hong Kong Monetary Authority (HKMA), with its wealth of US$43 billion foreign currency reserves, can be entrusted with the responsibility to safeguard the peg. In any case, it is the power of HKAB to improve charges on large deposits, rather than the IRA which covers only small accounts, that provides a possible mechanism to drive away international speculators and protect the peg in extraordinary situations, as happened in 1988. The rationale that competition will push the banks to stop servicing unrewarding small accounts is a puzzle by itself. If the small accounts need heavy subsidies as claimed by the HKAB, and if they have no attraction for the banks at all, why have not the banks got rid of them already? It is hard to believe that the banks continue to take on small depositors simply out of charity. Will depositors have to pay new service charges? If that is the case, so be it. The reasoning is plain. If a particular bank charges new fees for certain services, the other bank across the street will attract customers by providing the same services free. Competition by means of better service or lower fees will go on for some time, until the market consolidates, to the benefit of the customers. It is said that small banks want to keep the IRA more than the big banks do, but there should be no fear that the small banks will be driven out of the market by fierce competition when the IRA is scrapped. As pointed out by the HKAB itself, there has always been keen competition in the banking industry, even under the existing agreement. Not a single incident of bank insolvency has resulted from competition in the past two decades. (The collapse of BCCIHK, part of a wider international banking debacle, is, of course, another story.) The removal of the interest rate cartel will only mean extending the competition to another front. It will perhaps bring about a shake-up in the banks' marketing strategy. Some banks may provide more services, others may concentrate on a particular market segment, while yet others may bundle retail banking services with other peripheral financial products in order to outwit their competitors. Competition promotes efficiency. A motion debate on the IRA is scheduled for Legco later this month. The Consumer Council has presented the issue as a clash of interest between bankers and consumers. With all the flaws in it, the Council's report is likely to be supported by elected members of the Legislative Council, as well as those intending to take part in the next election. The IRA seems doomed to go. The HKAB issued a 14-page rebuttal which disputed point by point the allegations made by the Consumer Council. Apart from that, however, the banking community has appeared to be lukewarm in defending its position. Is it because it sees itself in a losingbattle, or perhaps the IRA is not worth fighting for after all? A conservative estimate puts 70 per cent of the local retail banking market under the Big Three - the Hongkong Bank, the Standard Chartered Bank and the Bank of China Group. Following the suggestions of the Consumer Council, we have been talking about competition unleashed by abolishing the IRA. Could it be that all this is an illusion: that, with the market dominated by the Big Three, the cartel will continue to be there, with or without the agreement?