HKMA urges Hong Kong banks to keep higher-than-Basel capital reserves

HKMA is leaning towards requiring lenders to hold up to 3.5pc of capital as a countercyclical reserve, exceeding Basel standards, sources say

PUBLISHED : Tuesday, 28 January, 2014, 12:24pm
UPDATED : Wednesday, 29 January, 2014, 9:02am

An HKMA suggestion that banks keep more capital on hand than required by global standards is being opposed by local lenders, which argue it will restrict the type of business they can engage in and put them at a disadvantage with global rivals, sources say.

However, Hong Kong banks have historically maintained capital adequacy ratios well in excess of those required by the Basel committee on banking supervision, according to Hong Kong Monetary Authority figures. It wants banks to set aside as much as 3.5 per cent of their capital as a countercyclical buffer, compared with a maximum of 2.5 per cent required by Basel, two sources said.

Countercyclical buffers are meant to be built up during times of earnings growth so that they can be drawn down when things are not going so well.

"It is such a waste of bullets when Hong Kong banks have to hold more capital just to meet the local requirement instead of doing business," a senior executive at a leading bank said.

"Some disadvantage may be brought to Hong Kong banks if their peers in other regions just follow the [more lenient] global standard."

Local regulators are allowed to modify or adapt Basel requirements to address local circumstances. The range the HKMA had proposed for the countercyclical buffer, 0 to 3.5 per cent of capital, would be applied to all banks in Hong Kong regardless of size, the executive said.

Basel requires such buffers to be in the range of 0 to 2.5 per cent of a bank's capital, with the buffer allowed to shrink when times are bad. "The banks are negotiating with the regulator on the final standard on the buffer for Hong Kong," said another banker familiar with the talks. "But it is likely that we will have a higher requirement."

Bankers warned that some banks might once again have to cut dividends to meet Basel capital reserve requirements, which are gradually being phased in. Dah Sing Bank declared no dividend for 2009, while Wing Hang Bank declared a lower dividend that year and Bank of East Asia reduced its dividend payout ratio for 2010.

HKMA executive director Karen Kemp told a press conference last week it was deciding the reference indicators, such as credit growth and gross domestic product growth, that would be used to determine the size of the countercyclical buffer to be imposed in Hong Kong as economic conditions changed. She did not disclose the range it was proposing.

The HKMA said in a paper submitted to the Legislative Council in 2012 that it might make "some modifications" to the Basel capital requirements "for prudential reasons having regard to local circumstances".

The Basel committee on banking supervision will require all banks to have a minimum capital adequacy ratio of 10.5 per cent by 2019, with the mandatory capital conservation buffer coming under this. With a countercyclical buffer as high as 3.5 per cent on top of the capital adequacy requirement, as suggested by the HKMA, Hong Kong banks would have to hold on to as much as 14 per cent of their capital.

Hong Kong banks have historically adopted a prudent approach to capital reserves, but bankers worry that higher mandatory requirements could limit the scope of new business.

The capital adequacy ratio of Hong Kong banks averaged 16.1 per cent at the end of September, up from 15.7 per cent at the beginning of last year. At the end of 2007, as the storm clouds of the global financial crisis gathered, it averaged 13.4 per cent.

Maybank Kim Eng Securities analyst Steven Chan said: "The extra requirement by the HKMA will create a more difficult operating environment for the sector."

When more restrictions were imposed on the use of capital, banks would earn less as they could only engage in businesses involving lower risks and lower returns, he said.

"More acquisitions may happen because the owners of smaller lenders struggle to run the banks with enhanced regulations, along with the keen competition in the market," he said.

But Alexander Li, an analyst at DBS Vickers, said he expected banks' net interest margins, a measure of lending profitability, would improve as ultra-low interest rates began to vanish. Higher interest rates would help banks increase the profitability of lending and generate more capital, he said.