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Following is a question by the Hon Emily Lau and a written reply by the Secretary for Financial Services and the Treasury, Professor K C Chan, in the Legislative Council today (October 17):
Question:
It has been reported that the sub-prime mortgage problem besetting the United States in recent months has triggered off a global financial turmoil and its domino effect has even affected the stability of the international financial market. In this connection, will the Executive Authorities inform this Council:
(a) whether they have assessed the impact of the sub-prime mortgage problem on the financial market and investment environment of Hong Kong; if so, of the assessment results; if not, the reasons for that;
(b) whether sub-prime mortgages are common in Hong Kong, and of the measures put in place by the financial sector to prevent the sub-prime mortgage problem; and
(c) of the details on the amount of money invested by the Hong Kong Monetary Authority in those investment vehicles using sub-prime mortgages as collateral and the losses incurred recently?
Reply:
Madam President,
Our responses to the questions raised by Hon Emily Lau are as follows:
(a) The recent sub-prime mortgage problem in the United States has caused substantial losses to a number of overseas financial institutions and is an issue of global concern. The Financial Services and the Treasury Bureau (FSTB) and the financial regulators have been keeping a close watch on the issue and the related developments. According to information available to the financial regulators, the financial market in Hong Kong remains structurally stable. The sub-prime problem in the United States has not caused systemic implications to our financial sectors.
According to the information submitted by banks to the Hong Kong Monetary Authority, the aggregate direct and indirect exposures of banks in Hong Kong to sub-prime mortgage are immaterial relative to their total assets. Such exposures will not have any systemic impact on the financial soundness of the local banking sector.
The Securities and Futures Commission has been in close dialogue with the industry with a view to monitoring the impact of the sub-prime mortgage problem. According to the information gathered, the direct exposure of authorised retail funds to the sub-prime market is insignificant, though some of these funds do have exposures to asset backed securities. As collateralised debt obligations (CDOs) markets in Asia are still at a development stage, the Asian market is not exposed to CDOs in the same way as the United States. The potential exposure to sub-prime of those hedge funds managed in Asia is not high.
According to the information gathered by the Office of the Commissioner of Insurance, the aggregate exposure of the insurers in Hong Kong to sub-prime assets is also relatively insignificant.
Although the sub-prime mortgage problem did cause certain volatility to the local financial market, no adverse impact on Hong Kong's general investment environment has been observed so far. Hong Kong's fundamentals remain strong. The FSTB and the financial regulators will continue to monitor the developments, maintain dialogues with the regulated sectors and conduct relevant and necessary assessments.
(b) Sub-prime mortgages generally refer to those mortgages targeted at borrowers with impaired or low repayment ability who may find it difficult to obtain finance from traditional sources. In granting mortgage loans, authorised institutions in Hong Kong are required to comply with the 70% loan-to-value ratio guideline and to make prudent assessment of the borrowers' repayment ability, by generally limiting the debt servicing ratio to 50%-60% of the borrowers' income. These mortgages are not considered to be sub-prime mortgages.
(c) The Exchange Fund's exposure to overseas mortgage markets is mainly through the appointed external fund managers specialising in mortgage-backed securities. These portfolios have no exposure to sub-prime mortgage loans, CDOs or collateralised loan obligations.
Ends/Wednesday, October 17, 2007
Issued at HKT 12:23
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