Arthur Yuen, deputy chief executive of the Hong Kong Monetary Authority, told the Hong Kong
Institute of Bankers’ annual conference that the US Federal Reserve’s decision to end its asset
purchase programme could create liquidity risks for Hong Kong banks.

Reuters

Hong Kong’s de facto central bank warned yesterday that the city’s lenders might face “very high” risks from rising interest rates, which will threaten to drain liquidity at a time banks have heavy loan commitments.

Arthur Yuen, deputy chief executive of the Hong Kong Monetary Authority (HKMA), told the Hong Kong Institute of Bankers’ annual conference that the US Federal Reserve’s decision to end its asset-purchase programme could create “liquidity risks” for Hong Kong banks.

The Hong Kong dollar is pegged to the US dollar, so Hong Kong’s domestic interest rates should rise in line with American ones. Still, economists have warned that rising US rates could suck funds out of emerging markets, depressing asset prices in Asia.

Higher interest rates and possible outflows would add stress to the loan books of Hong Kong banks, which some analysts fear are already too exposed to borrowers in China, where non-performing loans have been increasing. In April, the HKMA said that Hong Kong bank lending to mainland-related customers rose 30% in 2013 to HK$2.276tn.

Yesterday, Yuen said: “With these uncertainties in the interest rate cycle, we do think that the liquidity risk associated with banks in Hong Kong is still at a very high level – and with interest rates likely to reverse back to a more normal level, credit risk will also be a factor we need to look at.”

A “landscape of uncertainties of liquidity and credit risk arising from interest rate cycle” has emerged at the same time as the Hong Kong banking industry has experienced near-historic levels of credit growth, said Yuen.

This is the HKMA’s primary supervisory focus in the near term, he said, adding that he hoped banks would “sharpen” their focus on it.

At the same event, May Tan, executive director and chief executive officer of Standard Chartered Bank Hong Kong, said Hong Kong banks’ loan books are already coming under stress, adding: “With the (Chinese) economy slowing down, there is bound to be more impairment and we have seen more stress in our portfolio and I don’t think we’re alone in that.”

Huang Hong, deputy chief executive of Bank of China Hong Kong, said his bank had already adjusted its loan book to accommodate rising rates, commenting: “There will be an impact, but not a big impact.”

Yuen said that the HKMA plans to maintain unpopular lending controls introduced this year – known as the stable funding requirement (SFR) – until new international capital rules take effect in 2018.

He said the HKMA would launch a consultation on the funding ratio, which requires banks to hold longer-term stable funds to support their lending businesses. He warned banks not to attempt to circumvent the existing rules.

“If you have difficulties in implementing the SFR, don’t do funny things like booking things offshore,” Yuen said. “That’s good for your business but that’s bad for risk culture.”

 

 

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