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.
PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.
SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.
EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.
US Agencies (FDIC, FED, and OCC) issued a joint statement encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, to facilitate an orderly LIBOR transition.
The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS, endorsed a coordinated approach to mitigate COVID-19 risks to the global banking system.
HM Treasury extended the consultation period on Phase II of the Future Regulatory Framework (FRF) Review, from January 19, 2021 to February 19, 2021.
ECB finalized guidance on the way it expects banks to prudently manage and transparently disclose climate and other environmental risks under the current prudential rules.
BCBS published a technical amendment to the capital treatment of securitizations of non-performing loans by banks.
PRA published the policy statement PS23/20 on the calculation of stressed value at risk (sVAR) and risks not in value at risk (RNIV) under the market risk framework.
BoE announced that the Data and Statistics Division is planning to move collection of statistical data to the BoE Electronic Data Submission (BEEDS) portal.