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    HKMA Consultation on Framework for Supervision of Liquidity Risk

    November 04, 2019

    HKMA issued a consultation on Supervisory Policy Manual module LM-1 on the regulatory framework for supervision of liquidity risk. This module provides guidance to authorized institutions on the application of the Banking (Liquidity) Rules, or BLR, and sets out the approach HKMA will take in assessing the compliance of authorized institutions with the statutory liquidity requirements.

    HKMA requires each institution to maintain adequate liquidity in compliance with the minimum requirements on the statutory liquidity ratios (whichever is applicable) and to put in place sound systems and controls for the management of liquidity risk. The Banking (Liquidity) Rules under §97H(1) prescribe the requirements in respect of:

    • Liquidity Coverage Ratio (LCR), which is applied to authorized institutions designated by HKMA as “category 1 institutions”
    • Liquidity Maintenance Ratio (LMR), a local liquidity standard developed by HKMA for application to all other authorized institutions that are not designated as category 1 institutions and which are referred to as “category 2 institutions”
    • Net Stable Funding Ratio (NSFR), which has the same scope of application as the LCR (that is, category 1 institutions)
    • Core Funding Ratio (CFR), a modified version of the NSFR developed by HKMA for application to certain category 2 institutions that are designated as “category 2A institutions”

    Authorized institutions are also expected to observe any other supervisory requirements specified by HKMA from time to time to enhance liquidity risk management. HKMA adopts a risk-based supervisory approach to monitor liquidity positions of authorized institutions and assess the soundness of their liquidity risk management systems and controls through a combination of supervisory actions, including (but not limited to) risk-focused off-site reviews, on-site examinations, and prudential meetings.

    Keywords: Asia Pacific, Hong Kong, Banking Liquidity Risk, LCR, NSFR, Supervisory Policy Manual, Banking Liquidity Rules, HKMA

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