Washington, DC: International Monetary Fund (IMF) Executive Board Concludes Financial System Stability Assessmentwith Hong Kong SAR on May 21, 2021.
Sound macroeconomic and prudential policies over the years have provided Hong Kong SAR with important buffers to deal with the current slowdown and future shocks. The banking sector remains well capitalized, profitable and NPL ratios remain low. The Hong Kong SAR’s exchange rate mechanism, the Linked Exchange Rate System (LERS), continued to support financial stability and is supported by large foreign exchange reserves. In response to the COVID-19 pandemic, authorities have taken a multi-pronged approach to support the economy and maintain financial stability.
FSAP identified strong ties to mainland China, stretched real estate valuations and exposure to changes in the global market and national risk sentiment, compounded by escalating tensions between the United States and China, such as the main macro-financial risks. Stress tests conducted by the FSAP show that the financial system is resilient to severe macro-financial shocks and that the banking system is also resilient to liquidity problems, but there are pockets of vulnerability in branches of foreign banks, funds of investment, households and non-financial businesses. As a result, the FSAP made recommendations to strengthen the supervision of banking groups with both foreign branches and local subsidiaries in Hong Kong SAR, strengthen the supervision of liquidity risk for banks operating with several group entities. and ensure that the internal risk models for monitoring lending to mainland China are sufficiently forward-looking.
The institutional framework for macroprudential policies is functioning well and the current policy directions regarding real estate and counter-cyclical capital buffers (CCyBs) are appropriate. Nevertheless, there is still room to strengthen the oversight of systemic risks, improve communication and integrate non-bank mortgages into the regulatory framework.
Banking supervision and regulation remain strong overall and with respect to cross-border linkages and housing risks, but continued attention and review is needed with respect to competing priorities and the adequacy of bank resources. supervision. The creation of the Insurance Authority has considerably strengthened the regulation of insurance and the supervision of insurers and intermediaries. The regulatory and supervisory framework for securities trading systems has been strengthened since FSAP 2014, as has the coordination of supervision with mainland China.
Crisis management systems were considerably strengthened by the introduction of a comprehensive resolution regime under the Financial Institutions Resolution Ordinance (FIRO) in 2017. Update of certain aspects of the protection regime for financial institutions. depositors, including the scope of depositors’ preference, the mandate of the Deposit Protection Board, and the revision of the fund size of the deposit protection system would ensure full consistency with the FIRO.
The FSAP reviewed the active role of authorities in promoting Fintech and recommended taking a more proactive cross-sectoral approach as Fintech permeates all activities. FSAP welcomes the authorities’ plan for mandatory climate-related disclosures, common ground taxonomy and risk assessments.
Directors broadly endorsed the direction of the 2021 Financial System Stability Assessment (FSSA) recommendations. Noting the substantial macro-financial challenges the HKSAR economy has faced over the past two years. years on the domestic and external fronts, they have recognized the resilience of its financial sector, underpinned by sound policies, sufficient buffers and tight oversight. Looking ahead, directors considered that the main macro-financial vulnerabilities relate to strained real estate valuations and exposure to changes in the global market and national risk sentiment. Most directors also mentioned the risks associated with the extensive ties to mainland China, with a few directors also highlighting the long-term benefits of those ties.
Directors commended the resilience of the banking system to severe macro-financial shocks as part of the stress tests, but also noted pockets of vulnerability in the corporate, household and investment fund sectors. To further strengthen resilience, they encouraged monitoring household debt repayment capacity at a disaggregated level, strengthening data collection, and integrating non-bank mortgages into the regulatory framework.
Directors commended the strengthening of supervisory and crisis management frameworks since the 2014 FSAP. They agreed that banking supervision and regulation remain strong, but broadly encouraged the strengthening of supervision and control of bank risk. liquidity of banking groups with local subsidiaries and foreign branches. While noting that the Hong Kong SAR’s macroprudential policy framework is working well and that the current policy positions on real estate and countercyclical capital buffers are appropriate, the directors felt that there was room to further strengthen the systemic risk assessment and communication. Many directors also supported granting de jure operational independence to the Hong Kong Monetary Authority. Directors generally stressed the importance of continuing to strengthen regulation and uphold the rule of law in order to maintain a solid foundation for competitiveness as an international financial center.
Directors welcomed the strategic prioritization by authorities of climate change risk policies, including through mandatory disclosures, Common Ground taxonomy and risk assessments.
Directors commended the authorities’ active role in promoting Hong Kong SAR as a FinTech hub in Asia and encouraged continued coordinated efforts among regulators to guide a proactive and consistent cross-sectoral approach. They encouraged the authorities to continue improving the robust AML / CFT regime.
The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth assessment of a country’s financial sector. FSAPs contribute to Article IV consultations and thereby strengthen the supervision of the Fund. FSAPs are mandatory for the 47 jurisdictions with systemically important financial sectors and otherwise conducted at the request of member economies. The main findings of an FSAP are summarized in a Financial System Stability Assessment (FSSA).
At the end of the discussion, the Managing Director, in his capacity as Chairman of the Board, summarizes the points of view of the Executive Directors, and this summary is sent to the country’s authorities. An explanation of all the qualifiers used in the abstracts can be found here: https://www.IMF.org/external/np/sec/misc/qualifiers.htm.