HKMA Report Assesses Financial Stability of Banking Sector
The Hong Kong Monetary Authority (HKMA) published the semi-annual monetary and financial stability report for September 2021. The report highlights that climate change is one of the major emerging risks to financial stability. Based on a sample of syndicated loans in Asia Pacific, the report finds that banks in the region have started to price-in climate transition risk for loans to emission-intensive sectors since the Paris Agreement, suggesting that banks have begun to incorporate climate risk considerations in their existing risk management framework. Nevertheless, banks should keep abreast of the latest developments on climate risk management practices when considering their own risk management approach. In this regard, HKMA has actively engaged with banking industry to facilitate authorized institutions’ inclusion of climate risk management practices in their operations.
Among other issues, the report examines the recent performance of banking sector. Despite visible economic recovery in the first half of 2021, retail banks registered thinner profits. Notwithstanding the fall in profits, the Hong Kong banking sector remained robust and resilient. In particular, the asset quality of the banking sector was stable in the first half of 2021, with classified loan ratios staying low by both historical and international standards. Capital and liquidity positions of the banking sector also remained robust, providing strong buffers for banks to withstand shocks. Regarding the liquidity positions, the average liquidity coverage ratio (LCR) of category 1 institutions and the average liquidity maintenance ratio of category 2 institutions also maintained at high levels of 154.0% and 58.1% respectively in the second quarter of 2021. In addition, the latest ratios under the net stable funding ratio requirement stayed at levels well exceeding their statutory minimum requirements.
Looking ahead, the pace and strength of economic recovery remain uncertain as it will hinge on how the pandemic unfolds further. This, together with uncertainties over the future pace and direction of monetary policy in the major economies, will continue to pose challenges to the banking sector in Hong Kong. In view of rising indebtedness in the household and corporate sectors, banks should remain vigilant and carefully assess the potential effects of these risk factors on the asset quality of their loan portfolios. As part of its Quarterly Bulletin, HKMA also published a feature article that reviews the journey of Bond Connect and looks ahead to future developments of the scheme. Bond Connect is a mutual market access scheme that allows investors in Mainland China and overseas to trade, settle, and hold bonds tradable in the Mainland and Hong Kong bond markets through a linkage between the Mainland and Hong Kong financial infrastructure institutions.
Keywords: Asia Pacific, Hong Kong, Banking, ESG, Climate Change Risk, Transition Risk, Basel, Regulatory Capital, Liquidity Risk, Credit Risk, Bond Connect, Financial Stability, HKMA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
GLEIF Updates List of LEI Regulations, Embeds LEI in Annual ReportRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
