Hong Kong Monetary Authority (HKMA)
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Lending facility must be last resort, says Yam

Sean Kennedy

THE liquidity adjustment facility (LAF) is not an automatic rescue vehicle for banks with liquidity problems, Hong Kong Monetary Authority (HKMA) chief executive Joseph Yam says.

In a speech to the American Chamber of Commerce yesterday, Mr Yam spelt out the authority's operating brief since it took over from the Exchange Fund and the Banking Commission and outlined the uses of the LAF.

'Lender of last resort should mean what it says,' he said. 'The HKMA should not be a first resort for a troubled bank. We expect all authorised institutions in Hong Kong to have liquidity policies in place which, among other things, include contingency plans for dealing with a funding crisis.' In the days of the Exchange Fund, the fund's resources could only be used in a lender of last resort situation if a bank's problems could affect, directly or indirectly, the exchange rate.

The fund can now be used to maintain monetary and financial system integrity if that does not interfere with its role of maintaining exchange rate integrity.

'I should emphasise, however, that the secondary use of the fund is strictly limited to dealing with problems with systemic implications, and not for supporting individual banks.

'Of course, there may be occasions where financial support for an individual bank is necessary to prevent a domino effect across the whole banking system.' The introduction of the LAF would provide a channel through which overnight liquidity assistance to banks could be extended, he said.

'However, the main purpose of the LAF is to assist banks in making late adjustments to their liquidity positions, defined to be the balance in their clearing accounts.

'LAF should not be regarded as a substitute for prudent liquidity management, and banks are not expected to make use of it on a regular basis.' The LAF should be seen more as Hong Kong's version of a discount window than as a lender of last resort.

He said assistance through LAF was far from automatic and the guiding principle in considering whether to provide help was whether an individual bank failure would damage exchange rate stability or the monetary and financial systems.