The Hong Kong Monetary Authority oversees Hong Kong’s monetary system. It was founded in 1993 when the Office of the Exchange Fund merged with the Office of the Commissioner of Banking. Its responsibilities include maintaining currency stability, monitoring Hong Kong’s banking system and managing the Exchange Fund.
Hong Kong banks under scrunity over liquidity
Lenders in the city are requested to carry out frequent stress tests to make sure they can cope in the event of a massive outflow of hot money
The Hong Kong Monetary Authority is closely monitoring bank liquidity to prepare for a potential massive outflow of hot money, according to deputy chief executive Arthur Yuen Kwok-hang.
Yuen said the authority had requested local lenders carry out frequent stress tests to check they could cope with the situation, assuming half of the US$100 billion of hot money in the city flowed out of the banking system.
"Banks should have sufficient high-quality debt on hand that could be sold for cash any time, or they must have lending facilities with their parent banks to ensure they have funding supplies in case the market dries up due to the outflow," he said yesterday.
"Overall, the latest tests showed all banks in Hong Kong can maintain their liquidity position even if half the hot money leaves the city."
The US$100 billion of hot money inflow to Hong Kong has been the result of three rounds of quantitative easing in the United States since the financial crisis of 2008. Under the easing, the US has aggressively pumped cash into the economy to boost investment and spending, but some excess funds came to Hong Kong to speculate in the stock and property markets.
US Federal Reserve chairman Ben Bernanke hinted in June at tapering off this monetary stimulus. Yuen said local lenders had to prepare for the outflow as the end of quantitative easing would result in the hot money returning to the US.
The HKMA is also concerned about local banks' rapid loan growth in May and June, although the July figures showed this growth had returned to more normal levels.
Bank loans increased about 3 per cent month on month in June, or an annualised rate of 40 per cent, after a 1.7 per cent month-on-month increase in May, or an annualised rate of 20 per cent. Of that amount, 60 per cent was in US dollars. The growth over the two-month period is higher than the average of 19 per cent for the first six months.
"The strong growth in May and June may be a result of some multinational and mainland firms considering it was cheap to borrow US dollar loans in Hong Kong," Yuen said. "Initial figures on hand showed loan growth in July has slowed as the interest rates for US dollar loans have gone up."
He said many banks expected slower growth for the rest of this year as they usually were more aggressive in pushing lending in the first half.
Meanwhile, Yuen said the authority would also review a reform to tighten regulation of banks' majority shareholders that were not financial firms.
At present, the HKMA can request shareholders with a 50 per cent stake in a Hong Kong bank to report their management and important corporate deals.
Yuen said the authority might consider following the US by requiring the major shareholders to be set up as bank holding corporations that must meet certain capital requirements.