HKMA lends a hand to banks burdened by Basel III

The Hong Kong Monetary Authority will allow the city’s banks to use foreign currency liquid assets to meet the liquidity coverage ratio requirements of Basel III.

Both sovereign and local currency denominated high-grade corporate debt is in short supply in Hong Kong. Banks have until 2015 to meet the LCR. Hong Kong follows the Basel Committee on Banking Supervision's timetable.

The LCR requires that banks have enough high-quality, liquid assets to meet at least 30 days of their net cash outflows under a stress scenario. There are two forms of eligible assets: level one includes high-quality assets such as government bonds and cash while level two consists mainly of non-financial corporate debt subject to a 15% haircut.

Hong Kong strong economic performance means it does have enough government debt issuance to make up the LCR. Basel III, however, has three options that address this issue.

HKMA is said to favor the option in which holding liquid assets in a currency that does not match the currency of the associated liquidity risk.

Sources said it is likely HKMA will adopt the option of using foreign currency liquid assets to cover local currency liabilities when the framework is finalised by the Basel Committee.

Use of the foreign currency option by Hong Kong banks will probably be subject to restrictions and safeguards to control the currency risk and the extent of its use. It will also involve restricting allowable foreign currencies to those with sufficient liquidity and transferability.