Asian bank failure spurs push for reform

The reform of Hong Kong's free-wheeling financial system may be hastened by the failure of one of its largest banks. The government's most immediate concern is to preserve public confidence in the banking system -- and those regulating it.

Late Friday the government announced it would acquire the Overseas Trust Bank (OTB), which had declared itself insolvent the day before. The government gave daily operating responsibility for the bank to the Hongkong and Shanghai Bank, the colony's preeminent financial institution. The bank is to reopen today under the supervision of 20 Hongkong Bank officers.

OTB's problems ``appear to have arisen from criminal actions and not from lack of supervision,'' Financial Secretary Sir John Bremridge stressed in announcing the government's acquisition.

Much of the bank's $1.23 billion in assets have disappeared, government officials have indicated. The colony's Commercial Crime Bureau is investigating OTB's activities, and Hong Kong police have arrested four of the bank's officials -- one as he was boarding a plane with an alleged $125,000 in cash in his luggage. Over the weekend three bank officials were charged with contravening local banking laws.

The OTB's failure, which sent the Hong Kong stock market plunging, could have a lasting effect on the colony's large banking industry, which includes the branches of more than 100 foreign banks.

Industry executives reckon the government could respond with stiffened regulations and increased controls on banks doing business here -- particularly if lax government supervision is found to be a cause of the crisis.

Hong Kong has long sought to make itself a global center for banking and finance. But its loose regulatory environment has cut two ways.

On the one hand it has enlivened the colony as a haven for stock speculators and entrepreneurs. At the same time, it is preventing Hong Kong from increasing its relatively small share of the billions of dollars controlled by more cautious investors -- pension and mutual-fund managers and other institutions.

``In many ways, Hong Kong is still cowboy city,'' says one senior British fund manager. ``A lot of investors are still afraid of the place.''

There is general agreement in the business community here that more regulation is required to improve Hong Kong's financial system. But no one, as one banker says, ``wants to kill the goose that lays the golden egg,'' or dampen the colony's traditionally adventuresome spirit.

Accordingly, there is much debate over the government's reform efforts. It is already preparing legislation to improve accounting standards and require publicly listed companies, such as OTB, to disclose more about their activities.

It is also redrafting regulations governing the banking system. The pros and cons of such reforms go to the heart of a controversy over how the colony should modernize to compete in a global economy. This latest scandal is likely to strengthen the hand of those who favor more stringent official supervision.

Rumors of financial difficulties related to ``problem loans'' had been circulating in Hong Kong all week. Nonetheless, the government's swift action has left the financial community stunned.

``Anyone looking at the bank could see it had problems,'' says one senior banking executive. ``But no one expected the government to step in.''

The government takeover of OTB will cost the government a minimum of $260 million. Officials traced the bank's problems to 1981, when, they said, illegal transfers of bank funds began.

This solution closely resembles that applied in Hong Kong's last major financial crisis. When the Hang Lung Bank, another prominent local bank, ran aground two years ago, the same steps were taken.

OTB's problems may be at least partly related to the collapse of Hong Kong's real estate market several years ago. However, financial authorities have stressed that corruption was a significant factor in its failure.

Founded 30 years ago, the OTB has developed a network of almost 50 branches in Hong Kong. Its assets of $1.23 billion make the OTB a medium-sized institution by global standards.

OTB also operates in the Middle East, Europe, the United States, and Canada.