LawFlash

COVID-19: Hong Kong Monetary Authority — Liquidity Buffer Supervisory Expectations

07 апреля 2020 г.

As the outbreak of the coronavirus (COVID-19) continues, the Hong Kong Monetary Authority has introduced a number of initiatives to further support small-medium enterprises. These initiatives include enhancements to standby liquidity facilities, including that banks may temporarily operate with a lower liquidity ratio and defer the implementation of certain aspects of Basel III. 

In addition, the Hong Kong Monetary Authority (HKMA) announced on April 3 that it will contact each bank in Hong Kong to conduct drills for assessing operational readiness to access standby liquidity facilities. It will also reach out to assess whether each bank has integrated the utilization of liquidity buffers under its regulatory liquidity framework appropriately. HKMA’s announcement will have an impact on global banks operating through branches in Hong Kong, as they are also required to comply with HKMA’s liquidity rules. 

Liquidity Support Measures

HKMA, HKMC Insurance Ltd. (HKMCI), and major banks met with representatives from the commercial sector and members of the legislative council on April 3 to exchange views on the effectiveness of banks’ measures to support small-medium enterprises (SMEs) and discuss followup work in this regard.

As the outbreak of COVID-19 continues, HKMA, HKMCI, and banks put forward on April 3 the following initiatives to further support SMEs in addressing cash flow pressure:

  • HKMA will introduce a series of measures aimed at increasing the banking sector’s liquidity so that banks will have ample liquidity to support local economic activities.
  • The current level of regulatory reserves (i.e., portion of a bank’s retained earnings earmarked for the purpose of maintaining adequate provision for possible credit losses) will be reduced by half to release a total of 200 billion Hong Kong dollars of lending capacity.
  • HKMA has asked banks to automatically offer extensions of loan tenor or principal repayment holidays to qualified SMEs without requiring them to make an application. Borrowers only need to indicate whether they will accept the offer or not.
  • HKMCI and banks are at an advantage stage in their preparation for the special 100% loan guarantee under the SME Financing Guarantee Scheme, and banks will announce the dates to receive applications from qualified SMEs shortly.
  • Banks said that they will allow SME customers in the import-export and manufacturing sectors facing cash flow pressure due to delays in shipments to further extend the repayment period of trade financing facilities. They will also consider allowing more customers to apply to convert trade financing lines into temporary overdraft facilities so that customers can manage their cash flow more flexibly.

HKMA Liquidity Measures in Response to COVID-19

HKMA’s liquidity measures include three aspects:

  1. HKMA’s liquidity facilities framework
  2. The Federal Reserve’s Temporary FIMA Repo Facility
  3. New Supervisory Expectation on the use of Liquidity Buffers by Banks

HKMA Liquidity Facilities Framework

HKMA currently operates a liquidity facilities framework, which includes settlement facilities, standby liquidity facilities (SLF) and contingent term facilities. HKMA clarifies the operational parameters of the SLF in the April 3 Liquidity Measures in Response to COVID-19 Outbreak circular:

  • Tenor: While funding under the SLF is normally provided for a term of up to one month, HKMA is prepared to consider automatically rolling it over for additional terms to meet the longer-term funding requirement of each bank.
  • Pricing: HKMA will set the prices for SLF at levels that would help reduce market volatility.
  • Collateral: There will be a wider scope of assets eligible for being used as collateral for term repo under the SLF, which are not confined to High-Quality Liquid Assets (HQLA), as defined under the Banking (Liquidity) Rules (the Rules). 

For further details, please refer to the annex to the circular.

The Federal Reserve’s Temporary FIMA Repo Facility

The Federal Reserve announced on March 31 the establishment of a temporary repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility) to help support the smooth functioning of financial markets. HKMA, as one of the FIMA account holders, may enter into repurchase agreements with the Federal Reserve and temporarily exchange the US Treasuries held by HKMA for US dollars, which can then be made available to banks in Hong Kong.

The FIMA Repo Facility will last for at least six months starting April 6. HKMA is discussing the operational parameters of the FIMA Repo Facility in further detail, and it is in the process of devising a mechanism for banks to obtain US dollar liquidity from HKMA after the facility has come into operation.

New Supervisory Expectation on the Use of Liquidity Buffers by Banks

Under Section 10(1)(a) of the Rules, every bank in Hong Kong, irrespective of its place of incorporation, must calculate its liquidity coverage ratio (LCR) or the liquidity maintenance ratio (LMR), as the case may require, on the basis that covers all of its business in Hong Kong. LCR usually applies to larger banks and LMR usually applies to smaller banks. There is also a category of institution which is required to comply with the LMR and a local core funding ratio.  The liquidity framework for banking supervision in Hong Kong reflects the international standards published by the Basel Committee on Banking Supervision as part of its “Basel III” framework. 

In light of the prevailing uncertainties brought about by the COVID-19 outbreak, HKMA reiterated that banks may utilize their liquidity buffers in circumstances as prescribed by the Rules. HKMA will accept banks operating temporarily with a lower level of liquidity ratio as a result.

Specifically, Section 6 of the Rules provides that a bank which is required to comply with the LCR may monetize its HQLA under certain circumstances even though this may cause the bank to maintain an LCR less than that required by Rule 4 of the Rules. For a bank that is required to comply with LMR, the requirement to maintain the LMR above 25% on a monthly average basis entails that there may be temporary variations in the ratio so long as the monthly average ratio remains above the minimum requirement.

The circular provides that banks should, as a matter of priority, put in place internal policies and procedures for using HKMA’s liquidity facilities, especially the SLF. To ascertain compliance with HKMA’s new supervisory expectations, it will reach out to each individual bank to conduct drills for accessing the SLF. 

In addition, banks should ensure that the flexibility for the utilization of liquidity buffers under LCR or LMR, as the case may be, are embedded in the banks’ regulatory liquidity frameworks. HKMA will reach out to each individual bank to understand their internal procedures in this regard. 

Deferral of Implementation of Certain Aspects of Basel III

HKMA announced in its March 30 Deferral of Basel III implementations and HKMA’s supervisory actions in response of COVID 19 circular that it will defer the implementation of the following requirements for banks in Hong Kong:

  • Revised frameworks on credit risk, operational risk, output floor, and leverage ratio. The target implementation of these frameworks and their associated disclosure requirements will be deferred by one year to January 1, 2023.
  • Revised market risk framework. Locally incorporated banks will be required to implement the new market risk framework for reporting purposes by January 1, 2023. The local implementation of the actual capital requirements based on the new framework will be no earlier than January 1, 2023. Its timing will take into account the implementation progress observed in major jurisdictions.
  • Revised credit valuation adjustment (CVA) framework. The local implementation will be aligned with the revised market risk framework and follow the timelines used there both for reporting and the implementation of the CVA capital requirements. 

The above announcement is in addition to a number of measures that HKMA has introduced to alleviate the impact of COVID-19 on banks. The previous measures include HKMA’s decision to reduce the countercyclical buffer applicable to locally incorporated banks from 2% to 1% on March 16, 2020 and to cut the base rate to 0.86%. 

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