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.
HKMA acts to ensure banks get stable funds sources
The Hong Kong Monetary Authority (HKMA) is set to require lenders to secure a stable funding source to match their deposit tenor to loan tenor (the amount of time left for the repayment of a loan or maturity of a deposit) as the rapidly-growing number of loans issued in the territory has triggered concerns.
The growth of loans used in Hong Kong and outside the city has been rising fast since June, Norman Chan Tak-lam, chief executive of HKMA, said noting that the number was expected to have increased by around 19 per cent over the past nine months.
“As some bank lending is supported by short-term funding, a liquidity squeeze could result in a withdrawal of funds,” Chan warned. “We should [therefore] take measures to ensure a stable source of funding among banks.”
According to the HKMA, the total number of loans increased by 18.8 per cent in the first eight months of this year, surpassing growth in deposits over the same period. Banks’ loan-to-deposit ratio rose to 72 per cent at the end of August, up from 67 per cent at the end of last year.
At a media briefing in Beijing on Thursday, Chan said that the HKMA would talk with banks individually about their tenor matching conditions if it felt their loans were growing too fast.
Banks that are expected to maintain a fast rate of loan growth in the coming months may be required to prepare adequate funds to support their loan business next year, an HKMA spokesman said.
The tenor matching measures were first launched in 2011 and aim to ensure a stable funding source among branches of foreign banks in Hong Kong. Chan said the measures would in future be extended to all banks, including local lenders and branches of banks in the mainland.
The HKMA expects more than 40 banks will see the volume of their loans growing relatively fast, among which more than 20 banks may be required to boost funds from their stable funding source, depending on their full-year loan growth figures, the spokesman said.
Benjamin Hung Pi-cheng, chairman of the Hong Kong Association of Banks (HKAB), said on Friday that the HKMA’s tenor matching measures might slightly lift interest rates for deposits as banks would compete for deposits to secure stable sources of funding. He was on a visit to Shanghai and Beijing with a HKAB delegation led by Norman Chan.
“The increase in deposit rates may add pressure on banks’ NIM (net interest margin) and profit, but the impact will only be minimal,” said Hung, who is also the CEO of Standard Chartered Bank (Hong Kong) Limited. Despite the HKMA’s move, banks should also be discipline in controlling liquidity risk, he added.
The strong growth in loans could be caused by an increase in cross-border lending, Castor Pang Wai-sun, head of research at brokerage firm Core Pacific-Yamaichi, said.
Precautionary measures were necessary to avoid a liquidity crunch, he added. “If there is a shortfall between the tenor of deposits and the tenor of loans, banks would need to call in some loans and that could result in a tightening of liquidity.”
“The principle [of tenor matching measures] for all banks is the same, but it’s true that the funding source for wholesale banks has been less stable,” HKMA's Norman Chan said at the briefing. A bigger impact on foreign banks was expected as more of their loans were supported by wholesale funding sources, he said.
A larger deposit haircut would be applied to banks whose loans were supported by funding in the interbank market, while a smaller haircut would be neccessary if their funding were to come from parent companies, Chan said. A larger deposit haircut means a bank can lend out a lower percentage of deposits.
The source of funding has been more stable for retail banks with deposits from individual customers, he added.