The Hong Kong Monetary Authority (HKMA) announced Friday that it will give priorities to the study on deposit protection and credit register this year to produce a set of recommendations to meet the needs of Hong Kong's banking system.

David Carse, HKMA's deputy chief executive, told a press conference that the work priorities in 2000 of the Hong Kong banking sector will be given particularly to the implementation of recommendations of the consultancy study on deposit protection and credit register.

It will review in the first half of this year whether it is safe to proceed with the first stage of interest rate deregulationon July 1 and review the three-tie structure later in 2000, Carse said.

The first stage of the study will consist of a report by external consultants, aiming to appoint the consultants and for them to start work before the end of March 2000, he said.

The objective of the consultancy study on deposit protection is to make recommendations on the most appropriate features of a deposit insurance scheme for Hong Kong and to identify and evaluate viable alternative means of deposit protection, according to Carse.

Meanwhile, the study is aimed at considering the relative costs and benefits of deposit insurance and to produce a set of recommendations on which of the possible options would best meet the needs of the Hong Kong banking system and its depositors, Carse explained.

"We are also looking for measures to finalize the guideline on corporate governance, to implement risk-based supervisory approach, and to develop policy on, and enhance supervision of, e-banking," Carse said.

In 2000, the HKMA will remain the front-line regulator for exempt dealers and will devote more resources to supervision of the examination teams of information and technology specialists, Carse noted.

The HKMA will also focus their efforts on monitoring the progress on consolidation and banks' asset quality, on reviewing policies on money laundering, and on enhancing financial disclosure by banks, he added.

Reviewing the performance of the Hong Kong banking sector in 1999, Carse said that the HKMA's main tasks of the past year were preparations for Y2K issues, monitoring of asset quality, and involvement in corporate workouts.

On the balance sheet developments, Carse said, Hong Kong banks have had plentiful liquidity due to a continuing annual growth rate of 8.2 percent in deposits and continued decline of 8.7 percent annually in domestic loans.

Carse said that as the economic recovery gathers pace, domestic lending should also revive, believing that the increase in November is the first sign of this.

The excess liquidity has also had a beneficial impact on funding cost, though it is putting downward pressure on lending margins, particularly on residential mortgages, he said.

However, Carse warned that in setting the lending margins on long-term loans, banks need to beware of the risk that funding cost may rise.

As for profitability of local banks, Carse said that in aggregate, pre-provision operating profits are expected to have improved in 1999 due to the growth in average interest-bearing assets, maintenance of the net interest margin and reduction in operating expenses.

Looking ahead to 2000, Carse said that the banks are generally expecting a recovery in profits, driven by the expected reduction in bad debt charge in 2000.