Banks may face a higher capital requirement as the city's de facto central bank will step up its review of their capital adequacy levels.
Starting with their mortgage portfolios, the Hong Kong Monetary Authority would look at the robustness of the banks' entire loan portfolios, deputy chief executive Arthur Yuen Kwok-hang said.
"After four to five years of implementation of a model based on internal ratings, it is time for a review," Yuen said, referring to the flexibility given to some bigger banks to set their own risk weightings on loans.
Eight banks have been using this model to manage their capital, including HSBC, Standard Chartered, Bank of China (Hong Kong), Hang Seng Bank and Bank of East Asia.
Yuen said it would take time to review mortgage books and the authority would discuss with individual banks to decide which part of their loan portfolios would be reviewed next.
The authority has ordered eight banks to raise their risk weightings on mortgage business to 15 per cent from the earlier floor rate of 10 per cent. They must hold 50 per cent more capital on new mortgage loans as a result, raising the cost of mortgage business for them.
Yuen said the risk weightings the banks used previously might underestimate the potential risk associated with residential mortgages in view of the low interest rate environment.
HSBC, Standard Chartered and Hang Seng Bank raised their mortgage lending rates by 0.25 percentage point last week.
The Bank of East Asia will follow suit on new loans today, either at prime-based rates of 2.9 to 3.4 per cent, or the Hong Kong interbank offered rate plus 2.25 to 2.4 percentage points.
"The banking industry is already struggling to accommodate the capital and liquidity requirements laid down in the Basel III standards. If the monetary authority requires additional risk weightings, it will only increase our burden as well as costs," said an executive at a leading bank. "We are not sure if the additional costs can be passed on to customers."
If they are, borrowers may see more rate increases. On the other hand, if they are not passed on, banks' bottom lines will be dented.
Yuen did not say if the authority will have a floor risk weighting on other varieties of credit such as unsecured loans and credit cards.
Following the rate revision, mReferral Mortgage Brokerage Services has linked up with some banks to offer fixed-rate mortgage plans, under which homebuyers can enjoy a fixed interest rate of 2.15 per cent for the first three years.
The best lending rate ranges from 2.4 per cent to 3.5 per cent at HSBC, Standard Chartered and Hang Seng Bank.
Kostka Cheung Ho-hei, a senior chief vice-president at mReferral, said after some of the bigger banks increased their mortgage rates, there had been expectations of more rate increases.
The company is offering a fixed-rate scheme in view of this uncertainty. The loan period must be within 30 years and the amount at least HK$1 million under the scheme. After three years, the rate will be prime minus 3.1 percentage points.