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
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