Head in the Clouds
Bill Stacey, Next Magazine, November 15, 2012, A004.
High above Central in an eyrie so elevated that most people would get dizzy looking down, lies the offices of the Hong Kong Monetary Authority (HKMA). Its primary responsibilities are to maintain currency and banking stability, which require very specific and skilled, but limited, resources. However, the HKMA has always blanched at these constraints and envisioned a wider role as the “central bank of Hong Kong”.
Its expanding role can be seen in many areas. Take the budget. Compound average growth in its administrative budget is 10.4% over the 8 years to 2012 compared to government’s 4.4% in the same period. Its 2012 spending is set to go up by a further 24%. It is worth noting that it is not staff numbers (+4% per annum over 8 years) but staff costs (+5.6% per head, per annum over 8 years) that are amongst the main drivers. Consumer protection and the management of complaints have expanded to as much as 12% of total spending.
The growing empire now includes an swelling insurance operation, widening credit exposure through credit guarantees, international mortgage insurance operations, and a growing asset management function across a wider array of asset classes in addition to its traditional functions. The role in economic policy also seems to be expanding.
It is inevitable that as organizations stray further away from their core competence, their performance slips and risk increases. Anyone who has worked in a large organization has seen good decision making eroded as management becomes more remote from day to day operations.
Two areas of expansion in particular are troubling. The first is that the HKMA is increasingly involved in taking the very risks that the banking system it regulates is taking. Through the Hong Kong Mortgage Corporation (HKMC), mortgage credit risk is insured and financed. Now it has expanded to take on commercial credit risk through guarantees and so called micro credit schemes.
As a result, the HKMA is increasingly in competition with or facilitating the business of banks. The regulator has a funding cost advantage in the market, which distorts pricing for risk. It also creates a moral hazard: It might shy away from policies needed to slow the economy, as they would bring more risk onto the sovereign balance sheet.
Similarly, wider investment mandates for the exchange fund to garner higher returns are seductive, but require the HKMA to become a broader financial institution and compete with those managing our pensions for the best return assets.
The second concern is an increasingly broad role in economic policy, often under the guise of “prudential supervision” of the banks. The HKMA is widely seen in taking on an increasingly active role in containing property prices. Such expansion goes far beyond the HKMA’s mandate of maintaining currency and banking stability. Prudential control should not seek to stop banks from making losses. By too actively micro managing bank risks, it creates a moral hazard for banks that may lead them to worry less about prudence themselves. Ironically, this will increase rather than reduce systematic risks.
By straying beyond its core competence, HKMA has contributed to making housing less accessible. Very high down-payment requirements have kept private housing out of the reach of many wage earners, while not impacting Mainland cash buyers. New stamp duties further make buying less accessible for some. These policies have micro market effects on liquidity, rents and other asset markets. The HKMA has fuelled government worries about an imbalanced market, but its proposed solutions create more problems.
Once the monetary authority strays away from its prudential supervisory roles and puts its own credibility at risk, problems inevitably emerge. With two decades of exchange rate stability under a narrow currency board, lost credibility would be a tragedy for Hong Kong. The HKMA should come down from the clouds and focus on its basic roles.