Hong Kong regulators, nervous about lending, impose bank rules early

Hong Kong: A surge in business loans to the slowing mainland Chinese economy has prompted Hong Kong regulators to impose strict financial rules four years before they are required under new global standards.

The move is aimed at discouraging banks in Hong Kong from raising money by relying too heavily on short-term funds that can evaporate during periods of tumult. But big global banks have been resisting, over fears that the rules will cut into their profit by driving up loan costs.

Worries over credit squeeze

Worries are increasing about a credit squeeze in China. The Federal Reserve, too, is pulling back on its bond-buying programme, a stimulus effort that has helped keep short-term interest rates low and has made plentiful capital available for emerging economies like China.

The concern is that some banks in Hong Kong may be overly vulnerable if the Chinese economy stumbles significantly.

Overall lending by Hong Kong banks to mainland China companies and banks increased 32 per cent last year, to $465 billion, according to the Hong Kong Monetary Authority, the territory’s central bank. Growth in lending accelerated further in January, although it slowed somewhat in the next three months.

The credit analysis firm Fitch Ratings, which looked at a wider range of transactions, particularly trade finance, said on Monday that local and foreign banks in Hong Kong had an even bigger exposure to mainland China, totalling $798 billion. By comparison, banks elsewhere in Asia and the Pacific — mainly Australia, Japan, Macau, Singapore and Taiwan — have lent roughly $400 billion to mainland China, according to Fitch, which used data from the Bank of International Settlements.

“A ‘hard landing’ for China’s economy is a low-probability — but high-impact — downside risk to banks in Hong Kong,” Fitch said in a statement.

The Hong Kong Monetary Authority is phasing in new rules for local and international banks that operate here. The regulators have notified 69 banks with briskly growing loan books that they need to increase their long-term sources of funding, like retail deposits. Reducing their reliance on short-term funds would make banks less likely to cut back lending and credit lines if they have trouble borrowing in the international markets.

The authorities also have been admonishing banks to scrutinise borrowers carefully, particularly if their loan books are growing at least 20 per cent a year.

“What we have been telling the banks all along is that when you expand your loan book at that sort of rate of growth, make sure of your credit” assessment practices, Arthur Yuen, the deputy chief executive for banking regulation at the Hong Kong Monetary Authority, said in an interview.

Western and Japanese banks have been grumbling to the monetary authority. And a coalition of some of the world’s largest banks, the Asia Pacific Loan Market Association, is starting to become vocal on the issue, notably on the funding requirements. Banks “are concerned that this restricts the growth of the loan business in Hong Kong,” the group said in a statement.

Global banks have led the lending expansion, although with a few exceptions they have few or no deposits from Hong Kong residents. Those so-called wholesale banks say the new rules favour the banks with large bases of deposits here, including HSBC, Standard Chartered and Citigroup. The wholesale banks tend to borrow money a day or a week at a time at what are now extremely low interest rates in global capital markets.

The Hong Kong rules are aimed at matching new global regulations created in response to the financial crisis. The global rules, under the so-called Basel III accord, call for stable funding requirements, which push banks to rely less on short-term funding for long-term liabilities like loans.

But those rules are still being completed and don’t take effect until 2018. Hong Kong is moving more quickly, with banks being measured on funding as of March 31.

— New York Times News Service