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January 24, 2019

IMF published its staff report and selected issues report under the 2018 Article IV consultation with the People's Republic of China-Hong Kong Special Administrative Region (SAR). The staff report focuses on progress made toward implementing the 2014 Financial Sector Assessment Program (FSAP) recommendations and assesses the overall the health of the financial sector in Hong Kong SAR, including the implementation of Basel III. The selected issues report highlights Hong Kong SAR as a regional financial center and a gateway to Mainland China, examining the impact of external developments on the financial sector of Hong Kong SAR.

The staff report highlights that robust financial regulation and supervision should help weather domestic and external shocks. The implementation of Basel III requirements remains on track and the countercyclical capital buffer has appropriately been increased further. The authorities have also introduced the net stable funding ratio while rules on loss-absorbing capacity requirements for authorized institutions will be implemented by the year-end. Banks’ capital buffers and liquidity positions remain strong, due to stringent regulatory standards. Moreover, supervision of bank loans to property developers has been appropriately strengthened through higher capital charges, with Mainland China-related exposures being closely monitored. The overall financial exposure to Mainland China remains high, with about 39% of loans extended for Mainland-related purposes. Asset quality of that lending remained sound, with a nonperforming loan ratio of 0.64% in the third quarter of 2018. Appendix V summarizes the property market measures introduced since 2009 while the staff recommends that the authorities should also consider measures to extend the regulatory perimeter to reduce regulatory arbitrage from lending by property developers.

The staff report states that Securities and Futures Commission (SFC) intends to impose quantitative limits on margin lending by brokers. Moreover, the development of a risk-based capital regime for insurance companies is in Phase 2, with a focus on detailed rules for quantitative requirements. The staff report also concludes that the authorities have implemented all the main recommendations from the 2014 FSAP. Appendix IV details the 2014 FSAP recommendations and their implementation status while Appendix VI discusses the stats of the key recommendations of the 2017 Article IV consultation. The next FSAP for Hong Kong SAR is scheduled for 2019. The staff recommends that robust regulatory and supervisory framework should continue to be strengthened to limit buildup of risks.

The staff also recommends that fintech developments should be carefully evaluated to balance efficiency gains against potential risks. Continued efforts to support healthy development of the fintech sector will be the key to bolster standing of Hong Kong SAR as a regional financial center. Technology risks and cyber-security continue to be a focus, with the aim to achieve a balance between innovation and regulation. In this context, a number of initiatives are currently underway:

  • HKMA launched an Open Application Programming Interface (API) Framework for the banking sector in July 2018 to encourage greater banking sector competition and innovation; all retail banks will be required to have open API at the end of the implementation, which will take place over four phases.
  • The revised Guideline on Authorization of Virtual Banks was issued in May 2018.
  • The Faster Payment System, allowing the use of e-mails and mobile phones for payments in Hong Kong dollars and RMB across 21 banks and ten e-wallets, was launched in September 2018 and it supports instant, multi-currency payments on a 24/7 basis.
  • HKMA is strengthening collaboration with authorities in other jurisdictions to support innovation and information-sharing. A distributed ledger technology-based trade finance platform—eTradeConnect—was launched in October 2018. Meanwhile, the Enhanced Fintech Supervisory Sandbox, in operation since September 2017, helps to enhance communications between regulators and financial institutions on ongoing Fintech projects.

 

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Keywords: Asia Pacific, Hong Kong, Banking, Insurance, Securities, Basel III, Fintech, Article IV, FSAP, IMF

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