The recent draft Banking (Capital) (Amendment) Rules 2012 has given some opportunity for consideration of how government regulations can support our small-and-medium size enterprises (SMEs) without tax or subsidies.

The application of law by the government for various purposes is always a central theme in politics and economy that attracts media and public attention. Notable examples in recent years included the market failure arising from the collapse of Lehman Brothers. Since 2008, we have witnessed calls for and steps taken to regulate the financial industry, from the behavior of individuals in exploiting the sale of derivatives to institutional practices, such as the setting of interest rates like Libor.

Regulation is, of course, also required in other fields, such as the resolution of conflicts of commercial objective for maximizing profits in the provision of services and the interests of the public using the services. Notable examples are the sale and consumption of prescription drugs and alcohol, the food business, provision of personal or residential care, public transport, construction, film and television.

In Hong Kong, there has been continuous debate on economic policy, whether laissez faire, positive non-intervention, or Keynesian types of policy is the right approach in a free society. A lot was considered to protect those who have not, like class action and the competition bill. Regulations over these matters seem to be too little, and often seen as too late, which brings endless questions and queries in the Legislative Council over what the government has not done.

But regulation can be used as a very useful tool. Last week, we saw the capital liquidity rules for the biggest UK banks being quietly relaxed in an effort to stimulate lending. This move puts Britain at the forefront of a global experiment to use bank regulation to moderate the economic cycle.

What that scheme involved was the UK Financial Services Authority informed banks that they will not be required to hold any extra capital against new UK loans they make. That scheme, known as funding for lending scheme, was targeted at increasing money for corporate borrowers. UK-domiciled banks can treat that new lending as basically risk-free for regulatory purposes.

London regulators have also withdrawn from the tough overall capital rules they had imposed after the Basel III reform package was adopted. UK banks will no longer be required to achieve and maintain a core ratio equal to 10 percent of their assets, adjusted for risk, by the end of next year. On the other hand, individual UK banks have been given numerical targets for capital and have been told their ratio can drop below 10 per cent for the time being. This means banks cannot meet regulatory targets by cutting lending, but the flexibility on the ratio gives them room to expand lending as demand grows.

It's true that the policy objective in the UK of such de-regulation is to avoid rapid deleveraging that would harm activity in the economy.

The objective of Basel III is to improve the banking sector's ability to absorb shocks arising from financial and economic stress in the future. The Basel Committee on Banking Supervision (BCB) expects its member jurisdictions, of which the Hong Kong Monetary Authority (HKMA) is one, to begin the implementation of Basel III from Jan 1, 2013 in phases, with full implementation by Jan 1, 2019. It is the HKMA's current intention to implement Basel III in Hong Kong in accordance with the BCB's timetable, including the transitional arrangements. Consultation on the draft Banking (Capital) (Amendment) Rules 2012 is now on its way. Hong Kong does not have a problem for the UK economy-wise because of strong support from the mainland. But complacency is never part of the government's policy.

In Hong Kong, we do not have a policy of supporting SMEs through tax or subsidies. This means the SMEs are always at a disadvantage because their credit risks are often higher. The large companies can always have a competitive edge over the SMEs. They have powerful resources and lobbies to influence government policies and if seen fit to resist regulatory policies like class actions that might affect their profit growth. It's perhaps time that the relevant government authorities considered something along the UK line, although this time, the policy objective is different. It will be to maintain a strong SME environment and allow the Hong Kong economy to thrive.

The author is a HK barrister and chairman of the Hong Kong Bar's Special Committee on Planning and Policy.

(HK Edition 10/17/2012 page3)