Monetary Authority announces countercyclical capital buffer for Hong Kong
The Monetary Authority announced today (January 10), that the countercyclical capital buffer (CCyB) for Hong Kong will increase to 2.5 per cent with effect from January 1, 2019, from the current 1.875 per cent.
"A continued build-up of the CCyB is warranted in Hong Kong given that key indicators, such as the credit/GDP gap and the property price/rent gap, remain at elevated levels." The Monetary Authority, Mr Norman Chan, said. "In particular, the credit/GDP gap exceeded 19 per cent, suggesting that system-wide risks have not subsided, and the CCyB provides an additional measure of resilience should those risks crystallise."
Further details of the decision may be found in the Announcement of the CCyB to authorised institutions on the Hong Kong Monetary Authority's website.
In setting the CCyB rate the Monetary Authority considered a series of quantitative indicators and qualitative information including an "indicative buffer guide" (which is a metric providing a guide for CCyB rates based on the gap between the ratio of credit to GDP and its long term trend, and between the ratio of residential property prices to rentals and its long term trend). The credit and property price gaps remain at elevated levels and a simple mapping from the indicative buffer guide (calibrated against the CCyB range of 0 per cent to 2.5 per cent in the Basel 3 regulatory capital framework) would signal a CCyB of 2.25 per cent, 25bps lower than the current CCyB ratio absent the Basel III phase-in mechanism.
Whilst the indicative buffer guide, as its name suggests, provides a "guide" for CCyB decisions, the determination of a CCyB ratio is not a mechanical exercise and, in addition to the indicative buffer guide, the Monetary Authority also reviewed a range of other reference indicators. These included measures of: bank, corporate and household leverage; debt servicing capacity; profitability and funding conditions within the banking sector and macroeconomic imbalances. The information drawn from these sources suggests that a CCyB of 2.5 per cent would be more appropriate at this stage.
The CCyB is an integral part of the Basel 3 regulatory capital framework and is being implemented in parallel by Basel Committee member jurisdictions worldwide. The CCyB has been designed by the Basel Committee to increase the resilience of the banking sector in periods of excess credit growth. The banking sector can then act as a "shock absorber" in times of stress, rather than as an amplifier of risk to the broader economy.
The specific CCyB requirement applicable to a given authorised institution (AI) is expressed as a percentage of its Common Equity Tier 1 capital to its total risk-weighted assets (RWA). Each AI's CCyB requirement may vary depending on the geographic mix of its private sector credit exposures and the CCyB rate applicable in each jurisdiction where it has such exposures.
The CCyB, once implemented and triggered, "extends" an AI's Capital Conservation Buffer (also introduced by Basel 3) which is, like the CCyB, being phased-in from 2016 to 2018, beginning with a rate of 0.625 per cent of RWA in 2016 and increasing by equal instalments to reach 2.5 per cent of RWA from January 1, 2019.
The power to implement the CCyB in Hong Kong is provided by the Banking (Capital) Rules, which enable the Monetary Authority to announce a CCyB rate for Hong Kong if the Monetary Authority considers that a period of excessive credit growth in Hong Kong is leading to a build-up of system-wide risks in the financial system of Hong Kong.
Ends/Wednesday, January 10, 2018
Issued at HKT 17:45
Issued at HKT 17:45