Financial Strains and Banking Instability

In previous chapters, the growth and structure of Hong Kong’s banking industry, and its role in the supply of money and creation of credit have been analysed. The general conclusion is that the growth of the banking industry has been most impressive, and that the banking system as a whole has discharged its most important function — the supply of money and provision of credit — reasonably well. It must not be supposed however that this process has been a smooth and steady one. In fact, since the ’sixties the strains and stresses within the banking system that were accumulated earlier but hitherto hidden largely from the public have become more and more evident. The most dramatic expression of such strains was the eruption of the banking crisis in 1965. There were however other incidents which, though less serious than the 1965 crisis, constituted nevertheless sufficient evidence of many managerial and structural deficiencies. A review of these events therefore serves as a salutary reminder that behind the façade of rapid growth the banking sector is highly vulnerable to internal strains and external shocks.