Although Hong Kong has been successful in maintaining banking stability over the rather extensive cycle in the property market, banks and regulators should be alert to developments in the US sub-prime mortgage market, Monetary Authority Chief Executive Joseph Yam says.

In his Viewpoint column published today, Mr Yam said although a sub-prime mortgage market does not exist in Hong Kong, people should not underestimate the financial market dynamics, which are changing all the time, accelerated by financial innovation and intense competition.

"There is always the risk that a sub-prime mortgage market of the type we see in the US might develop in Hong Kong without the market noticing it, and, worse still, for it somehow to creep onto the balance sheet of the banking system, given the role of the banks as funding institutions, directly or indirectly.

"This is not to say that we do not want a sub-prime mortgage market in Hong Kong. As long as risks are accurately assessed, properly priced and prudently managed, the banks are free to lend. But as banking supervisor, we maintain a keen interest in how these tasks are performed by the banks during our risk-based supervision, now enshrined formally in Basel II, and we are acutely conscious of the possible effects of fierce competition in the mortgage market on credit underwriting standards and asset quality."

The authority will continue to work with banks as well as the industry associations and the advisory committees to ensure the banking system's safety and stability, Mr Yam added.