Timely, Sustained and Effective Macroprudential Policy: Exploring the Political Economy of Hong Kong’s Prudential Standards in the 1990s

The Hong Kong authorities oversaw a tightening of banks’ mortgage lending standards in 1991 and subsequently reinforced them in the years before the property crash in 1997–98. That this wrenching crash did not result in a banking crisis requiring wholesale government support points to the success of this policy. This chapter analyses its political economy by drawing on contemporary explanations, archival evidence and interviews to identify the policy’s motivations and management. Historically specific features of Hong Kong’s economy and politics no doubt encouraged this innovation and contributed to its effectiveness. More broadly, we draw three lessons. First, the absence of an independent monetary policy in a very small, very open and very leveraged economy spurred the early use of direct macroprudential policy. Second, studies of such policy have neglected what we call “define, survey and inform” as a useful means for bank supervisors to provide market participants with the public good of information regarding the aggregate outcome of their decentralised credit decisions. Third, if new international standards for capital adequacy release bank capital, a policy response may be imperative to avoid ruinous competition among banks.