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Hong Kong Monetary Authority (HKMA)

Overseas banks push back on HKMA's new deposit base rule

HKMA's new funding requirement may force loan business offshore as it puts international banks at a disadvantage over local institutions

PUBLISHED : Monday, 12 May, 2014, 2:58am
UPDATED : Friday, 26 January, 2018, 4:14pm

The Hong Kong Monetary Authority's fears about mainland exposure could drive international loan business to competing financial centres, according to market players.

In January, the HKMA introduced its Stable Funding Requirement, which requires banks in Hong Kong to increase their deposit base if their loan book grows by more than 20 per cent per year. The provision was rolled out to limit banks' ballooning exposure to mainland borrowers in the context of credit tightening and slowing economic growth across the border.

Bankers at international institutions complain that the rules disadvantage their firms, which typically have little or no branch network in Hong Kong from which to gather deposits.

"I think this was poorly handled by the HKMA," said a head of loan syndications at a large regional bank. "All the local [banks] are in good shape. But those without a deposit base have to raise more deposits, which is not easy and it's expensive."

Janet Field, managing director of the Asia Pacific Loan Market Association, a trade body representing loan banks, said the group had met with the HKMA to discuss these issues, but the regulator had denied it was imposing any form of quota.

"Several board members have expressed concerns about the HKMA potentially imposing quotas on local banks' lending to mainland Chinese companies following an increase in lending," said Field. "They are particularly concerned that this could result in banks booking assets outside Hong Kong in other Asian countries that don't impose quotas."

The problem for global banks is compounded by the fact that mainland banks are competing aggressively for market share, pushing up deposit rates.

"The Chinese banks are going after market share, partly by sacrificing margins," said Macquarie banking analyst Ismael Pili. Deposits are getting scarce, which is hurting banks' business in Hong Kong.

"Hong Kong banks' loan growth has far exceeded the deposit growth, which has pushed the local lenders to manage their loan book more cautiously," Hang Seng Bank chief executive Rose Lee Wai-mun said at the annual general meeting on Friday.

Deposit growth is getting expensive just as the HKMA requires banks to grow deposits. International banks are responding by booking their loans offshore, keeping their loan growth in Hong Kong below the threshold at which they would have to raise more local deposits.

"This is where the whole thing is a bit silly … banks are not booking loans in Hong Kong," said the banker. "For a deal with Sinopec, a bank can book it in Singapore, London or wherever. If you think HKMA is being difficult, you can book it elsewhere." The HKMA would not comment on the specifics of banker complaints, except to say its Stable Funding Requirement was a simple rule applied consistently across institutions.

"We expect [banks] to understand the longer-term benefits of such supervisory requirements and not unduly focus on short-term cost or impact," a spokesman said.

Fitch issued a report last week that indirectly defended the work of the HKMA. Fitch commented on Hong Kong banks' rising mainland exposure. It said both foreign and local banks were disclosing higher non-performing loan ratios for China-related loans, and that local banks' lending was becoming more concentrated on the mainland.

Chikako Horiuchi, director of financial institutions for Fitch, said Hong Kong banks' mainland exposure has grown rapidly since 2010, moving banks' traditional concentration from the property sector towards the mainland. She said Hong Kong banks' gross mainland exposure amounted to 19 per cent of assets at the end of 2010 but had risen to 35 per cent by the end of last year.

"China concentration is building up in the system. It's time for HKMA to address this," Horiuchi said.

Bankers said they agreed with the principle that the authority needs to monitor banks' lending risks on the mainland. However, they complained the HKMA's Stable Funding Requirement unfairly targeted international banks, which were well capitalised and well regulated in their home markets.

Small, independent Hong Kong banks would be most exposed to mainland defaults, as their total loan book is the most heavily weighted to China. But these banks have extensive branch networks in Hong Kong and are best positioned to increase their local deposit base.

The HKMA's Stable Funding Requirement was less of a hurdle to these institutions, said bankers, even though they are the ones who were most at risk.