HKMA chief defends strict banking rules

Monetary Authority head defends city's stringent regulatory rules, but sidesteps IMF comments over independence and mainland exposure

PUBLISHED : Tuesday, 22 July, 2014, 12:29am
UPDATED : Tuesday, 22 July, 2014, 12:29am

The chief executive of the Hong Kong Monetary Authority defended the city's strict banking rules as some of the best in the world, amid a flurry of recent international concern over the territory's banking system.

The International Monetary Fund last week criticised the HKMA's lack of independence from Hong Kong's executive branch, which is granted the unqualified power to direct the monetary authority. HKMA also came under fire for rising risks that Hong Kong banks face owing to their exposure to borrowers in mainland China.

"I cannot subscribe to the notion that banks in Hong Kong would be placed at a competitive disadvantage compared with other banks because the HKMA imposes additional or higher regulatory requirements on top of the international minimum standards under Basel III," HKMA head Norman Chan Tak-lam said in a statement.

Chan did not mention the IMF's observations on HKMA's independence and largely sidestepped Hong Kong banks' risks, mentioning mainland exposure only once.

The de facto central bank and banking regulator held Hong Kong banks at above the international standards for capital ratio levels and claimed stringent supervision has kept capital buffers higher than those at many financial institutions in the United States and Europe.

Hong Kong's exposure to the mainland spiked by 29 per cent in 2013, accounting for 20 per cent of total banking assets, or HK$2.3 trillion, according to Moody's.

In a report last week, the IMF underlined similar risks associated with a swift downturn in economic growth on the mainland.

Chan's statement focused on management of asset-liability risks at domestic banks, as well as regulation of investment options available to commercial and retail customers directly through banks, or what he called Hong Kong's "financial supermarket".

After the onset of the global financial crisis, HKMA established two oversight arms to manage the so-called supermarket. The departments deal directly with bank customers and bank conduct in market activity.

"The key issue here is they don't want a repeat of Lehman," said Alexander Lee, research director at DBS Vickers Securities in Hong Kong. Banks have been required to match the risks of investment products better with customer appetite and that has added to bank procedures. "It's hard to say [if the measures were effective] because we haven't had a real downturn in the market since 2008," Lee said.

Despite Moody's Investors Service's overall negative outlook on Hong Kong banks for the next 12 to 18 months, the rating agency in a report issued late last month said it expects financial institutions in the territory to maintain "sound capitalisation".

"The results of our adverse stress-tests scenario underline the banks' strong loss absorbing capacities," the report said. "The results show that the banks can maintain healthy capital levels even when problem loans and associated losses increase."

Moody's deeper concerns rest in domestic banks' ability to absorb shock from the deterioration of assets on the mainland.