January 22, 2018

IMF published staff report and selected issues report in context of the 2017 Article IV consultation with People’s Republic of China—Hong Kong Special Administrative Region (SAR). Directors commended the substantial progress in implementing the 2014 FSAP recommendations, in addition to the continued efforts to strengthen the regulatory and supervisory framework for financial stability. They encouraged the authorities to balance the trade-off between greater efficiency and maintaining stability in the face of rapid developments in fintech. Directors noted that macro-prudential measures have been effective in building buffers in the financial system and any adjustment of macro-prudential measures should be based on evolving financial stability risks.

The staff report reveals that banks have built up strong capital buffers and ample liquidity, owing to the enhanced regulatory and supervisory frameworks. The capitalization of the banking sector remains strong and well above international standards. In light of HKMA’s assessment of the credit-to-GDP and property price-to-rent gaps, a countercyclical capital buffer (CCyB) was introduced (currently at 1.25%) and will be further raised to 1.875% in 2018. Banks have ample liquidity, with liquidity coverage ratio (LCR) of category 1 institutions at 144.2% and liquidity maintenance ratio of category 2 institutions at around 50% in the second quarter of 2017— with both the ratios being well above their respective international minimum standards. The authorities noted that Mainland China-related risks were prudently monitored by banks and risks were manageable, with more than three quarters of exposures to large Mainland China state-owned enterprises and multinational corporations. They also emphasized that they were not complacent about the currently low non-performing loans (NPL) ratio (of 0.8% as of the second quarter of 2017), as the current credit cycle had not yet turned.

With regard to implementing the 2014 FSAP recommendations, the staff report highlights that a comprehensive framework for recovery and resolution, which was established under the Financial Institutions (Resolution) Ordinance, commenced operation in July 2017. HKMA, Securities and Futures Commission (SFC), and Insurance Authority (IA) will take actions to orderly resolve non-viable systemically important financial institutions. Additionally, the development of the new risk-based capital regime for insurance companies is in “Phase 2,” focusing on detailed rules for quantitative requirements. Further strengthening the oversight regime for non-bank institutions (including securities markets, broker dealers, and asset managers) would prevent risks, including those arising from new channels connecting Hong Kong SAR and Mainland China. Recent efforts to enhance coordination among different regulators, including coordination platforms for new fintech businesses, is also a welcome development. 

The authorities are supporting fintech business developments through various channels, including establishing the fintech Facilitation Office, the Fintech Innovation Hub, a central bank digital currency project, and closer cross-border collaboration with Singapore and Shenzhen on fintech development (including the recently announced initiative with Singapore on Distributed Ledger Technology-based trade finance platform). Developments, challenges, and opportunities related to fintech in Hong Kong SAR is one of the key focus areas of the selected issues report. This report assesses the fintech developments in Hong Kong SAR, takes stock of government support initiatives, and outlines regulatory challenges for an industry that has no border and crosses traditional institutional boundaries. It also seeks to map out fintech development opportunities for Hong Kong SAR that can complement and bolster its role as an international financial center. It is recommended that, going forward, the authorities should continue to review and enhance the regulatory framework for fintech to ensure that it remains effective. In this context, plans of HKMA to launch the Enhanced Fintech Supervisory Sandbox by the end of 2017 and a single point of entry that integrates different agencies’ regulatory sandboxes for pilot trials are welcome developments.

 

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Keywords: Asia Pacific, Hong Kong, Banking, Securities, Insurance, Article IV, Fintech, Regtech, FSAP, Recovery and Resolution Framework, IMF

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