THE Hong Kong Association of Banks (HKAB) will stage its formal comeback against the Consumer Council today. It will face the council head-on when it tables a response to the council's report questioning the fair treatment of depositors, at a meeting of the Legco sub-committee on finance, taxation and monetary affairs. The submission claims that small depositors, the banking system, and Hong Kong's exchange rate would suffer if the interest rate agreement (IRA) were phased out. Backed up by substantial data and an independent consultancy which has access to detailed cost and revenue figures from individual banks, the HKAB argues that banks incurred a total loss of $3.8 billion in 1992 in running small depositor accounts, ranging from savings and current to time deposit. Yet banks were willing to suffer operating losses to maintain the IRA-covered accounts because of other more compelling objectives to maintain banking stability and equal competition between small and big players, it claims. HKAB presents data showing that there are sufficient substitutes for IRA-covered deposits, such as foreign currency deposit accounts, swap deposits, savings plans and money market funds offered in a variety of maturities at minimum balances as low as $1,000 in some cases. HKAB shows how depositors have been using these alternatives at times when savings rate was unattractive. It criticises the Consumer Council's methodology of using prime-deposit rate spreads to assess bank profitability. The spread measures overall performance across retail, corporate, investment banking and treasury, but proves inadequate to reflect deposit-taking activities. While stressing that the interbank-deposit rate differential is a more appropriate indicator of deposit-taking activities, the HKAB submission demonstrates that the spread has narrowed significantly over the past several years. Contrary to what the council said, services charges for transaction accounts in Hong Kong were significantly lower than other international banking markets. Banks were not only prepared to suffer losses to maintain banking stability, but HKAB analysed the timing of IRA adjustments since 1989 and showed that depositors benefit greatly because saving rates frequently rose faster and fell slower than the market. In a formal response to the attack by the Consumer Council, HKAB paints a rather gloomy scenario, foreboding the disastrous aftermath if the agreement were phased out. The destabilising effect on the banking system because of fierce competition among banks for deposits will be compounded by any adverse developments as Hong Kong approaches 1997, it claims. It argues that without the agreement, only well-capitalised banks will stand to benefit by out-competing their smaller counterparts. This is because the IRA acts as an instrument to mitigate any detrimental effects, such as predatory pricing, arising from the dominating market position of a few banks. ''Intense price competition and an unstable banking environment would likely hit smaller banks hardest,'' it states. It claims, stronger banks will then gain market share or acquire failing banks but the community will suffer from a reduced capacity in the banking sector. Naturally, fewer banks provide less consumer choice. ''Because of higher service charges and lower availability, depositors with small amounts of savings could be eliminated completely from the banking system.''