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Hong Kong Monetary Authority (HKMA)

HKMA to highlight liquidity risk in stress test for local banks

Stress test model will be thorough, transparent and examine every possible scenario banks may face in capital outflow, says regulator

PUBLISHED : Friday, 24 January, 2014, 2:02pm
UPDATED : Saturday, 25 January, 2014, 3:03am

The Hong Kong Monetary Authority plans to conduct a thorough stress test on local banks this year, warning of excessive credit growth and mounting liquidity risk as capital flows out of the city's banking system in response to the tapering of quantitative easing in the United States.

The stress test would focus on banks' ability to cope with tighter liquidity, and especially the adequacy of US dollar capital, as foreign investors keep cashing out from emerging markets, the city's banking regulator said yesterday.

"Liquidity risk is the top stress point we should watch out for in 2014," HKMA executive director Henry Cheng said.

"The US dollar loans have been climbing up rapidly in recent years in Hong Kong, which has put pressure on banks' liquidity risk control.

"The test model will be thorough and examine every possible scenario that local banks could face, under different degrees of capital outflow."

The US dollar loan-to-deposit ratio at Hong Kong lenders has jumped to 85.4 per cent from 73.1 per cent at the end of last year, according to HKMA data released yesterday. The overall loan-to-deposit ratio stood at 70.4 per cent at the same time, up from 67.1 per cent a year earlier.

The Hong Kong dollar weakened by its biggest margin in two years to hit a low of 7.7641 against the greenback yesterday, as some funds flowed out of the city to the US and some fled the foreign exchange market to subscribe to equity offerings.

Banks which satisfied Basel III capital requirements could still be vulnerable in some test scenarios, Cheng said.

"We hope to spot those banks through the test … and will talk with them individually."

A dozen local banks were in need of specific measures to stabilise their capital bases, most of them local branches of foreign banks with no outlets in the city to absorb deposits, Cheng said.

Unlike previous tests, in which the regulator decided the indicators and asked banks to send feedback, the upcoming one would be "unprecedentedly transparent", being the first time that the regulator would work with banks to study possible indicators for the test, he said.

The HKMA is already conducting a consultation with local banks about their risk controls in granting personal loans, which have grown rapidly over the past few years, helping to send local property prices soaring.

Banks have been ordered to conduct internal stress tests on their personal loan portfolios based on a 3 percentage point rise in interest rates.

Hong Kong banks had been asked to complete the personal loan consultation by March and submit their feedback to the HKMA in mid-April, Cheng said.