Search

NEWS
FINANCIAL SERVICES | Staff Reporter, Hong Kong
Published: 23 Jun 11
1169 views


Is Hong Kong’s banking sector in trouble?

The Royal Bank of Scotland says there is risk of a financial crisis after an extended period of ultra-loose monetary conditions in Hong Kong.

However, this may not be the case as it has enough fiscal reserves which can be drawn upon in times of trouble.

Here’s more from RSBM:

Monetary conditions in Hong Kong have been ultra-loose for an extended period. The difference between the real growth rate and the real interest rate should be negative in equilibrium, because people face unlimited incentives for leverage when the return on investment or the real growth rate exceeds the costs of financing or the real interest rate. Currently, investment returns exceed financing costs by 6 percentage points. The last time that monetary conditions were this loose was in the early 1990s. When monetary conditions eventually reversed during the Asian crisis, banks experienced a liquidity crunch and nonperforming loans soared from 2% to 10%. Looking at higher frequency data I find that monetary conditions have been this loose for about 1.5 years. By comparison, the period of monetary accommodation in the early 90s lasted for 4 years.

Vulnerabilities on the asset side

Low interest rates have led to significant build-up in leverage, thereby raising banks' credit risk. Credit has been growing at 30% yoy over the last 7 months. The last time we saw these growth rates was at the outset of the 1980 debt crisis, in the lead-up to the 1997 Asian crisis, and on the eve of the 2008 Lehman collapse. As a result, outstanding credit to GDP grew from 195% of GDP at end-2008 to 255% of GDP today, and residential property prices surpassed their Asian crisis peak in early 2011. In terms of sector breakdown, credit to wholesale and retail businesses, trade financing, and credit for use outside Hong Kong, mainly China, recorded the fastest growth rates. Exposure to mainland China amounts to about 20% of bank assets and is of particular concern given the potential of a Chinese credit/property bubble.

Despite these developments, it seems that the credit risk of the Hong Kong banking sector is manageable. To begin with, outstanding credit was significantly higher in the past-355% of GDP in 1995-and yet Hong Kong avoided any bank failure or bank recapitalization during the Asian crisis. Second, the minimum down payment for home purchases-usually at 30%-was repeatedly raised since October 2009. Meanwhile, the required down payment for luxury apartments and non-owner occupied properties amounts to 50%-and 60% for non-residents (for a detailed list of prudential measures, refer to the Appendix). In addition, Hong Kong banks are among the best capitalized in the world. Finally, the Hong Kong government has fiscal reserves amounting to 33% of GDP which could be drawn upon if cracks do show up in the banking sector.

Vulnerabilities on the liabilities side

Strong credit growth and a new fondness for RMB deposits have also put strains on banks' balance sheets: the HKD loan-to-deposit ratio increased from 69% in October 2009 to 81.7% in March 2010, exposing banks to greater liquidity risk. Moreover, the maturity of deposits has fallen steadily since 2007 with the share of time deposits dropping from 58% to 35%. In response the Hong Kong Monetary Authority in May asked banks to conduct stress tests assuming that half of the deposits added since late-2008 are withdrawn over the next 12 months. Banks' liquidity risks need to be taken particularly serious in the context of a currency board. This is because the authorities no longer control the amount of money under a currency board and, hence, can no longer act as lender of last resort.

Despite the recent rise, Hong Kong's loan-to-deposit ratio is still moderate by regional and historical standards. At 80% Hong Kong's loan-to-deposit ratio is just a whisker above the regional median. From a historical perspective, the recent rise looks even less alarming. As shown in Figure 8, Hong Kong's loan-to-deposit ratio was significantly above the current mark for most of the past 30 years, and as recently as October 2008. Regarding the maturity of deposits, it is definitely at the low end, but has been at these levels for the better part of 2004 without significant ramifications.

Moreover, banks' liquidity ratio remains well above the regulatory minimum. The loan-to-deposit ratio ignores that banks can sell non-loan assets to meet liquidity needs and that demand and savings deposits may not be such a stable source of financing during periods of stress. Hence, the HKMA also monitors banks' liquid assets (debt securities and loans due within a month) to short-term liabilities and requires that this ratio stay above 25% on a monthly average basis. The liquidity ratio for retail banks fell from above 50% in 2007 to 36.7% in 2011Q1, but remains well above the statutory requirement.

Hong Kong has usually been spared during episodes of major capital reversals. While it is probably an exaggeration to call Hong Kong a safe heaven, it has shown remarkable resilience in the face of major risk reversals. At the height of the Asian crisis Hong Kong experienced capital outflows of merely USD 6 billion, or well below its usual capital account deficit. Again, in 2008, when global emerging markets experienced the largest capital reversal on record, Hong Kong recorded one of its strongest capital account positions.

In conclusion, Hong Kong is one of the most open and most flexible economies in the world. Its citizens and regulators are well accustomed to large and sudden reversals in economic fortunes and capital flows. If the past 30 years are anything to go by, Hong Kong should withstand a reversal of the current episode of ultra-loose monetary conditions. 



Sign up for our newsletter

 

Do you know more about this story? Contact us anonymously through this link.

Click here to learn about advertising, content sponsorship, events & rountables, custom media solutions, whitepaper writing, sales leads or eDM opportunities with us.

To get a media kit and information on advertising or sponsoring click here.

Tags: banking, financial crisis

LATEST FINANCIAL SERVICES JOBS »
PRINT ISSUE »

Subscribe Now
Cash-flush tourists in HK

218 views

Is Central Hong Kong a ghost town in the making?

341 views

As goes Singapore, so goes Hong Kong?

283 views

MOST READ EXCLUSIVES

Hong Kong’s 5 hot new restaurants in September

Hong Kong’s 5 hot new restaurants in September

More international brands made their way into Hong Kong’s F&B industry.

by KRISANA GALLEZO
20 Oct 2014 | 1717 views
 

Check out BASF’s new environment-friendly headquarters

Check out BASF’s new environment-friendly headquarters

The company cuts 50% of its electricity consumption every month through LED lighting.

by KRISANA GALLEZO
29 Sep 2014 | 1430 views

Check out HK’s first dining-in-the-dark restaurant

Check out HK’s first dining-in-the-dark restaurant

Experience an actual blind date at the Alchemy in the Dark.

by KRISANA GALLEZO
10 Oct 2014 | 1429 views
 

Take a tour at Hong Kong’s first modern French restaurant

Take a tour at Hong Kong’s first modern French restaurant

And, get to know the three-Michelin-starred Chef behind its creation.

by KRISANA GALLEZO
23 Sep 2014 | 1082 views

The Langham Hong Kong completes US$30 million refurbishment

The Langham Hong Kong completes US$30 million refurbishment

Check out the new London-style suites and its award-winning Artesian Bar.

by KRISANA GALLEZO
27 Oct 2014 | 967 views
 

Do you want to build a killer app?

Do you want to build a killer app?

Altitude Labs will make your ideas happen – Silicon Valley-style.

by KRISANA GALLEZO
9 Oct 2014 | 670 views

Are you ready for Italian mania? Jamie’s Italian finally hits Hong Kong

Are you ready for Italian mania? Jamie’s Italian finally hits Hong Kong

The new outlet features a bold graffiti mural by the founder’s long-time pal.

by KRISANA GALLEZO
3 Nov 2014 | 668 views
 

The future of innovation: What’s next after Facebook and Twitter?

The future of innovation: What’s next after Facebook and Twitter?

A video version of Twitter might be under way.

by KRISANA GALLEZO
11 Dec 2014 | 639 views
close Don't Show Again

STAY INFORMED! Get our free weekly newsletter