In a bid to curb rapid credit growth in the city, the Hong Kong Monetary Authority has told banks to ensure they match deposit and loan tenors to maintain a stable source of funding.
And early signs are that the authority is likely to achieve its aim, with some bankers already saying they would prefer to slow lending growth rather than leave money in idle deposits.
The comments came after banks received documents from the HKMA last week explaining how it wanted them to do the calculations to ensure they held a stable funding source that matched their deposit and loan tenors (the amount of time left for the repayment of a loan or maturity of a deposit) if their outstanding loans had grown by more than 20 per cent this year.
The HKMA took the step after noting on October 18 that outstanding loans in the first eight months of this year increased by 18.8 per cent. Chief executive Norman Chan Tak-lam said banks would be required to secure funding that more closely matched their lending books.
"We are now preparing to match the requirement with funds in longer tenors, and this will drive up our costs of funds," said Wing Lung Bank treasurer Terry Siu Kai-hung. "But quite a portion of our customer deposits are backed by certificates of deposit, and from our assessment the new requirement will not have a significant impact on us."
Some bankers said the requirement would act as a brake on their lending strategy. "It is not worth lending so much money - especially in loans with such low interest rates," said a senior bank executive who declined to be named.
Mainland-related loans are the biggest driver in the city's loan growth, and the banker said he now expected expansion in these loans to slow.
"Some cross-border loans, usually denominated in US dollars, are backed by letters of credit and may have an interest rate of slightly above 1 per cent," he said. Those returns would be too low if the banks now had to back them with long-tenor funds.
Banks which have grown loan books by more than 20 per cent this year have now been told by the HKMA that a portion of loans in excess of 70 per cent of total customer deposits must be secured by "stable funds", according to a banker who saw the document issued by the authority on Friday.
Funds from parent company, its own capital and certificates of deposit could be regarded as stable funds, the banker said, citing the document, and the required level of stable funds must be in place by February next year.
The higher the loan growth, the greater the portion of stable funds that would be required.
The HKMA said that to reduce the impact on the credit market and the economy of potential financial market instability, it had written to certain banks that had loan growth approaching or exceeding the banking sector's average. "If the pace of their loan growth continues at or exceeds the current level, they would be required to maintain specific level of stable funds to match their loan growth from next year onwards," it said.