HKMA published the semi-annual financial stability report for September 2020. Among other issues, the report assesses the performance of banking sector in the backdrop of ongoing crisis induced by the COVID-19 pandemic. Considering the risk factors and uncertainties identified during the assessment, the report highlights that banks should carefully assess the longer-term impact on the asset quality of their loan portfolios, particularly as the recession may weaken the repayment ability of corporates and households. As part of its Quarterly Bulletin, HKMA also published a feature article describing the latest developments in Hong Kong in the area of green and sustainable banking.
Financial stability report
The financial stability report highlights that retail banks in Hong Kong have recorded thinner profits alongside a slight deterioration in asset quality in the first half of 2020, as the economic downturn deepened amid the global COVID-19 outbreak. Nevertheless, the banking sector has remained resilient, underpinned by strong capital and liquidity positions by international standards. The consolidated total capital ratio of locally incorporated authorized institutions stayed largely unchanged at about 20.7% at the end of June 2020, compared with six months ago. The Tier 1 capital ratio edged up to 18.7%, with 16.6% being contributed by Common Equity Tier 1 (CET1) capital. The average liquidity coverage ratio of category 1 institutions hovered at a similar level of 156.5% in the second quarter of 2020, from 159.9% in the fourth quarter of 2019, which were well above the statutory minimum requirement of 100%. The average Liquidity Maintenance Ratio of category 2 institutions mildly increased to 57.2% in the second quarter of 2020 from 56.4% in the fourth quarter of 2019, also well above the statutory minimum requirement of 25%. The average NSFR of category 1 institutions remained at a high level of 133.1% in the second quarter of 2020, well above the statutory minimum requirement of 100%.
In response to the pandemic, HKMA, together with the banking sector, has taken proactive measures to reduce cash-flow pressure on borrowers. These measures supported stable flows of credit to help the economy ride out this difficult period. Looking ahead, the banking sector in Hong Kong will continue to be challenged by a number of downside risk factors, including uncertainties over the path of global and domestic economic recovery amid the COVID-19 pandemic and rising U.S.-China tensions.
Developments in green and sustainable banking
The article on the developments in green and sustainable banking points out that HKMA is pushing ahead with its initiatives to address climate-related issues, support sustainable finance, and promote green and sustainable banking. Over the past year, a common assessment framework has been developed to measure the “greenness baseline” of individual authorized institutions; the first round of self-assessment has been completed; and a white paper has been published on green and sustainable banking to outline our initial thinking on supervisory expectations. The next step is to develop supervisory requirements on climate risk management for authorized institutions, regarding which HKMA plans to consult the industry in the first half of 2021. Apart from developing supervisory requirements, HKMA is also exploring ways to facilitate authorized institutions' management of climate-related risks and growing green businesses. For instance, HKMA will invite authorized institutions to participate in a pilot climate stress testing exercise to assess the climate resilience of the sector. Consultancy studies will also be conducted to review and address potential obstacles to the development of green and sustainable banking in Hong Kong. The goals of these initiatives are to build climate resilience within the banking system as well as to raise authorized institutions’ awareness of climate risks and broader sustainability issues.
FCA and PRA in the UK, FED in the US, and the authorities in Singapore have fined Goldman Sachs for risk management failures in connection with the 1Malaysia Development Berhad (1MDB).
BCBS announced that OSFI and the Bank of Canada hosted the 21st International Conference of Banking Supervisors (ICBS) virtually on October 19-22, 2020.
FCA proposed guidance on how firms should continue to seek to help customers who hold insurance and premium finance products and may be in financial difficulty because of COVID-19, after October 31, 2020.
EBA issued an opinion on prudential treatment of the legacy instruments as the grandfathering period nears an end on December 31, 2021.
ESRB published the fifth issue of the EU Non-bank Financial Intermediation Risk Monitor 2020 (NBFI Monitor).
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APRA announced that it has increased the minimum liquidity requirement of Bendigo and Adelaide Bank for failing to comply with the prudential standard on liquidity.
PRA published the consultation paper CP17/20 to propose changes to certain rules, supervisory statements, and statements of policy to implement elements of the Capital Requirements Directive (CRD5).
US Agencies adopted a final rule that applies to advanced approaches banking organizations and aims to reduce interconnectedness in the financial system as well as to reduce contagion risks associated with the failure of a global systemically important bank (G-SIB).
US Agencies (FDIC, FED, and OCC) adopted a final rule that implements the net stable funding ratio (NSFR) for certain large banking organizations.