Stating this at the IBA international banking conference, Raymond Li, executive director, Hong Kong Monetary Authority, said on Wednesday: "In the coming years the banking sector is poised to see less and less of regulatory mechanism. However, it would not mean that the supervisory controls would diminish."

Lately, there has been an increased emphasis on risk management by banks which reflected an increased involvement by banks in complex trading activities like derivatives.

Regulators are also increasingly shifting away from rule-based external regulation to risk-based supervision as the markets evolve and become more advanced, Li said.

A trend on greater reliance on internal risk management by banks as well as and the marketdiscipline also seems to be emerging in banking systems around the world, he added.

With these developments it has now become essential that regulatory approach with underlying market characteristics is important.

In the regulatory approach, however, there should be focus on prevention, integration of risk management of various risks across the businesses which need to be systematically identified, measured, monitored and controlled, he said.

There should be evaluation of factors which include credit, market and other tangible risks for example legal risk and reputational risks amongst others, Li emphasised. At the same time, there should be more public disclosure of the working of a banking system as well as an emphasis on risk rating methodology and capital adjustment-market risk.

Speaking on the supervisory trends in Hong Kong, Li emphasised that in identification and assessment of risks there should be use of CAMEL rating system of the best to worst in order to evaluate the risks in each bankingand its operational and financial soundness.

Apart from this, the source of information for risks should be either through on-site examination, off-site review and liaison with external auditors. The Hong Kong Monetary Authority's current efforts in the area of supervision in the banking sector included removal of the 40 per cent guideline, more focus on internal risk management of autonomous institutions, market discipline exerted through public disclosure.

Li also emphasised that the Y2K compliance by banks was of utmost importance in this direction and it had even laid out a deadline for Y2K compliance for its banking system by the end of 1998.