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SCMP Reporter

THE Consumer Council and the Hong Kong Monetary Authority (HKMA) have attempted the impossible in trying to quantify the risk incurred in the hypothetical situation of abolishing a 30-year-old institution in the run-up to 1997.

  Yet, both have come back with completely different conclusions.

  While the Consumer Council advocates a phased approach to dissolving all of the interest rate rules by 1997, the Government has stopped short of that by removing only the interest rate cap on time deposits next year.

  Besides the different interests the two bodies represent, the methodology in conducting their respective studies accounts for some of the divergences.

  On the main contention as to whether or not the banks' high profitability is because of the large interest rate spread generated by the favourable rules, the two studies are miles apart.

   The consumer watchdog looked at specific interest rate spreads such as prime fixed deposit rate spreads and prime savings rate spreads in the period from 1978 to 1991.

   The HKMA, meanwhile, used the net interest margin, a supposedly more comprehensive indicator covering a wider spectrum of the banks' activities. The net interest margin is ''the difference between interest receipts and interest expense expressed as a percentage of total assets''.

  The margin includes, in addition to the specific interest rates quoted in the council's report, the interest rates received and paid on all other assets and liabilities.

  ''It also takes into account the benefit which the banks in Hong Kong receive from not paying interest on demand deposits,'' the HKMA says.

  The margin, which stood at 2.06 per cent in 1993, was average by international standards.

  Other indicators also highlighted that Hong Kong banks are no more profitable than banks elsewhere. The loan-to-deposit ratio is lower than those elsewhere, which makes the territory's banks' assets more liquid. As liquid assets tend to yield less, profitability is negatively affected.

  Non-interest bearing liabilities such as demand deposits made up only 12 per cent of total Hong Kong dollar deposits at the end of 1993.

  Neither did Hong Kong banks charge higher fees and commissions than overseas banks.

  To explain the high profitability of Hong Kong banks, the HKMA shifted its focus from interest margins to other indicators of the health of banks - cost income ratio and ratio of bad debts to total assets.

  On both items, Hong Kong banks scored well among their overseas counterparts. The 37 per cent cost income ratio was certainly much lower than the 61 per cent for large British banks.

  Apart from taking a different approach in explaining the banks' profitability, the two bodies also put forward opposing arguments on how banks benefited from the rules.

  The Consumer Council insisted that with no close substitutes, the banks would be foolish not to take advantage of the rules.

  However, the HKMA argued that there were close substitutes, albeit imperfect. Swap deposits, which are available for deposits as low as $30,000 and for maturities as short as seven days, prompted the HKMA to conclude that the amount of rules-covered time deposits which cannot be substituted by swap deposits is small.

  Besides, the narrowing differential between the US dollar savings deposit rate over the Hong Kong dollar equivalent supports the view that US dollar deposits as a substitute have limited the ability of the banks to obtain excess profits from Hong Kong dollar savings accounts.

  Furthermore, the HKMA says that non-price competition, such as the provision of more branches and automatic teller machines, has already eroded any profits from the interest rate rules.

  Finally, the HKMA challenged one of the basic premises in the council's report - banks are commercial enterprises aimed at maximising their profits.

  The banks were prepared to constrain their profit-maximising behaviour in the interests of maintaining systematic stability and their own self-interest, said the HKMA.

  ''We believe that HKAB [the Hong Kong Association of Banks] has generally adopted a responsible attitude towards its rate-fixing role,'' the HKMA report said.

    While such faith in the banking sector's public conscience may seem ill-placed to the sceptics, the de facto central bank says it will keep in close touch with the HKAB to ensure financial innovation and prudent competition.

  That, perhaps, is the second invisible concession from the Government on top of scrapping caps on time deposits.



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