Internationalization of Capital Market

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Alternatives

- Economic Condition

In 1997 Asian economic crisis, Hong Kong was hit by the bubble in the property and stock markets. The interest rates climbed to the peak and kept at high levels that banks were in fears of declining asset value. Under the economic pressures, investors were too scared to invest on MBS or any ABS. The government system gave investors with confidence that would be preferred than non-government system. It was hard for any private bank to offer lower interest rate in that period, which wouldn’t increase the liquidity and transaction compared to what HKMC could offer. With the Hong Kong Government system, the recovery time would be shorter for the market, and the reformation could help banks minimize future damages. It’s worth to mention that Hong Kong Government injected HK$3 billion into the capital market that essentially enhanced the development of MBS market in Hong Kong.

Recommendation

According to the case, John Lee’s bank was very conservative regarding to the MBS market. The bank didn’t see much potential benefits from the MBS and ignored the development of HKMC. To decide whether or not joining the HKMC, the bank should consider both advantages and disadvantages of being a member of servicing banks. Since HKMC was organized and mainly controlled by the Hong Kong Government, a profit reduction for individual banks in the programme were expectable. All banks in the system were sharing the same MBS standard and structure that no extraordinary income or strategy could be applied to any of these private institutions. There was no evidence supported that HKMC wouldn’t be failed in the future, the low liquidity and trading volume were still the major problem of Hong Kong’s debt market. The lack of independence could limit banks’ ability of minimizing damage when a crisis hits the market. The servicing banks relied on the HKMC would have to bear the losses whenever mortgage securities market in Hong Kong failed again.

But, I still recommend the bank to partner with HKMC in developing MBS in Hong Kong. Beside the benefits of being a servicing bank I mentioned earlier, the additional reasons are listed as following:

- HKMC was offering guaranteed returns on MBS in their back to back structure.

- It is a great opportunity for the bank to enter a new security market that can increase its profit without lowering its loan interest by joint the HKMC.

- The strategy used in HKMC was mutually beneficial for both banks and HKMC. Banks could decide which mortgage security should be invest in the long run and on which they can use to earn good higher rating since they had the right to hold back the securities.

- By joining and developing the HKMC, the bank would get more benefit from the MBS market. The investors would be more confidence to invest in MBS and so the increasing transaction will expand the primary and secondary market.

Based on these reasons, I believe John Lee’s bank should partner with HKMC at least at the beginning phase so that they could enter the MBS market easily and won’t have to put themselves into higher exposure risk.

Conclusion