Prudent risk assessment and management are as essential as healthy competition for efficient financial markets, Monetary Authority Chief Executive Joseph Yam says.

In his latest Viewpoint article, Mr Yam said he is encouraged by the deregulation of interest rates. Hong Kong banks' net interest margin is now only 1.63%. Depositors are getting more than they would otherwise have done for their deposits and borrowers, for example home buyers, are paying less for their loans.

"This efficiency was achieved without any erosion of credit quality. Competition has not compromised prudence. But it is obviously something that we should all be alert to," he said.

"Pressure to perform under intense competition, at both the institutional and the employee levels, encourages risk taking, which could eventually undermine the stability of the financial system, the confidence of those using it and the public interest in effective financial intermediation."

Mr Yam said dealers in the foreign exchange and money markets complain about the lack of volatility limiting the opportunity for them to make decent profits, partly due to the Linked Exchange Rate reform introduced in May.

Currency stability key

Currency stability, defined clearly in the Government's monetary policy objective as a stable exchange rate, is obviously in the wider public interest, which must prevail, he said.

"This 'conflict' between the private interests of market practitioners in making profits out of market volatility and the public interest in monetary and financial stability has been in existence as long as there have been financial markets.

"It is not easy to strike a balance. But, subject to prudential considerations, overseas financial institutions may be allowed access to the domestic market as financial intermediaries. This is generally the case in Hong Kong and is one contributor to the renowned efficiency, specifically of the banking system of Hong Kong."