Paper for the PLC Panel on Financial Affairs

Financial positions and future monitoring of banks in Hong Kong after the recent currency crisis in Asia

Background

1.The currencies and financial markets of Southeast Asia have suffered major shocks since the floating of the baht on 2 July 1997. The table below shows the performance of the currency and the stock markets in the region-

2.As shown above, the most affected countries are Thailand, Indonesia, Malaysia and the Philippines (the affected countries). The HK$ was also under pressure on one or two occasions during this period but the Hong Kong Monetary Authority has effectively fended off the speculators.

Financial position of banks in Hong Kong

3.Of the 366 authorised institutions in Hong Kong, 5 banks, 9 restricted licensed banks and 21 deposit taking companies come from the affected countries. They do not have a significant market share in Hong Kong, accounting for 4.5% in deposits (mainly offshore), 3% in loans and 4% in total assets. The financial condition of these AIs' operations in Hong Kong is at present comfortable in terms of liquidity, foreign exchange positions and asset quality.

4.AIs in Hong Kong do not have significant exposure to the affected countries. In aggregate, AIs' external claims on these countries account only for 4.9% of total external claims and 2.6% of total assets. As far as local banks are concerned, aggregate claims amount to only 0.37% of their total assets. A large proportion of such exposures are to Government or are fully secured. The currency crisis therefore does not have a significant direct impact on the financial position of local banks.

5.The currency crisis however has had two side effects-

1. it has caused increased volatility in the local financial markets, especially the stock market. The HKMA has been exercising additional vigilance over the share margin financing activities of AIs, including requiring daily reporting from those institutions which are more involved in this market. In general, AIs seem to have maintained prudent loan to value ratios for share financing and no problems have arisen so far from the decline in share prices;

2. the interest rates in the interbank market (represented by 1-month HIBOR) have increased by about 1.81% since the end of June. Best lending rate has not been increased though individual banks have raised the margin on some of their lending (including new residential mortgage loans). The effect has been to compress lending margins. The average margin between best lending rate and 1-month HIBOR has averaged 1.74% in the third quarter compared with 2.95% in the first half of the year. This will have some adverse affect on profitability in the second half of the year, but the banks will be cushioned to some extent by the good results in the first half. With the recent strengthening of the exchange rate, there should be scope for interest rates to ease back from their current levels.

Future monitoring

6.The HKMA is actively monitoring the development of the currency turmoil and the financial position of banks in Hong Kong. Given the strength of the Hong Kong banking sector and the relative stability of the local markets, the HKMA is confident that the banking sector is capable of withstanding the recent turmoil.

7.We however should not be complacent. One of the lessons learnt from the crisis is the importance of a robust banking sector and an effective prudential supervision framework, including measures to ensure that property lending is conducted in a prudent and responsible manner.

29 September 1997
Hong Kong Monetary Authority