Friday, December 09, 2005

The Economics of the C rate

The Hong Kong Monetary Authority has just launched a new lending benchmark rate, called the C-rate, in a bid to boost market transparency and help consumers understand how their loans are priced. That is from a story in South China Morning Post, read it here.

You may think it must be the case that Hong Kong's banking industry is so uncompetitive that banking firms have no incentives to fulfill customers' needs. Hence, to "protect the consumers' interests", HKMA has to stepped in to take care of customers' interests.

But this is simply not true...the story above quoted Joseph Yam, chief executive of HKMA as saying that "[s]even years of deregulating interest rate charges by banks had produced a competitive market."

In a competitive market, if customers find that the lending rate charged by a bank is unreasonable high and the basis upon which the rate is determined opaque, then the customers can always punish the bank in question by moving their businesses elsewhere. In other words, competition will ensure that customers' interest be taken care of. Why the HKMA needs to launch a new benmark rate then?

Several possible answers:

1) HKMA wants to transform itself from a currency board into a full blown central bank;
2) Guys at HKMA are stupid;
3) HKMA wants to justify its value of existence.

Any one of these answers is bad for the Hong Kong people. Now who says public officials are out there looking after the "public interests"?

No comments: