LCQ1: Incidents of a number of banks in the United States being taken over
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Question:
It has been reported that the Silicon Valley Bank (SVB) in the United States (US) was closed down and taken over by US regulators on the 10th of this month, which has aroused market concerns, and there were even a number of small banks having problems and being taken over by local regulators subsequently. Moreover, some Hong Kong-listed companies have issued announcements one after another to disclose the amounts of their deposits with and their risk exposures in SVB. In this connection, will the Government inform this Council:
(1) whether it has assessed the amounts of direct and indirect risk exposures of authorised institutions under the supervision of the Hong Kong Monetary Authority (HKMA) to the SVB incident, and the risks to be brought to the local financial market when the SVB incident further deteriorates and spreads to other US banks; whether a mechanism targeting this incident has been put in place to avoid further deterioration of the situation; if so, of the relevant mechanism;
(2) whether it knows if the Hong Kong Exchanges and Clearing Limited and the Securities and Futures Commission will request all Hong Kong-listed companies to conduct detailed analyses and issue announcements in respect of the SVB incident and the risk exposures arising subsequently, so as to fully protect the interests of investors; if they will, of the details; if not, the reasons for that; and
(3) as some analyses have pointed out that the situation of SVB being unable to pay its debts with all its assets is related to the substantial increase in interest rates by the US Federal Reserve Board (FRB) since last year, which has caused the bond portfolios held by banks to incur huge losses, whether HKMA has noted that local banks have similar risk exposures, and whether it has assessed the level to which FRB continues to increase interest rates will cause local banks to have the same risks; whether HKMA has put in place a mechanism to expeditiously detect relevant problems and intervene early, so as to avoid creating panic in the market; if so, of the details; if not, the reasons for that?
Reply:
President,
Regarding the various parts of the question, in consultation with the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC), the Hong Kong Exchanges and Clearing Limited (HKEX), and the Insurance Authority (IA), my reply is as follows:
(1) The Government and the financial regulators have been closely monitoring the developments of banks in the US being taken over, and have assessed the possible subsequent risks and collateral impacts. Overall speaking, the incident has brought minimal impact to Hong Kong's banking system, monetary stability and financial market.
For the authorised institutions under the supervision of the HKMA, Silicon Valley Bank (SVB) not being an authorised institution under the Hong Kong's Banking Ordinance only maintains a local representative office in Hong Kong. Therefore, it is not permitted to carry on any banking business or the business of taking deposits in Hong Kong. Besides, according to the HKMA's assessment, the exposure of banks in Hong Kong to SVB is very limited. Hong Kong's banking sector is resilient with strong capital and liquidity positions, while the Linked Exchange Rate System has been functioning well with the Hong Kong dollar market continuing to operate in a smooth and orderly manner. The incident has not posed a significant risk to Hong Kong's banking system and monetary stability.
Apart from the banking sector, the SFC and the IA have already taken corresponding actions. Having reviewed relevant information, the SFC and the IA have affirmed that the direct and indirect exposures of the securities and insurance sectors to the SVB incident is limited.
In addition to assessing the impact of the SVB incident on the local financial system, the Government and the financial regulators have also assessed the possible subsequent risks and collateral impacts. In particular, it is noted that the collapse of SVB has led to a confidence crisis affecting several other small to mid-sized banks in the US. In this connection, the US regulatory authorities have implemented a series of measures to prevent the crisis from spreading further (e.g. guaranteeing access to all deposits of SVB, and providing liquidity to banks in need). Nevertheless, the HKMA and the SFC will continue to require banks and licensed corporations in Hong Kong to adopt prudent risk management practices to manage and control risks stemming from volatilities in the financial market and uncertainties in the external environment. The IA has also strengthened the monitoring of insurers' solvency and asset-liability matching, and conducts regular stress tests on parameters such as interest rates, stock markets and credit spreads under different scenarios with a view to protecting the interest of policy holders.
We consider the possible subsequent risks to Hong Kong's local financial market arising from the incident to be manageable. We and the financial regulators will continue to closely monitor the development.
(2) The HKEX has promptly investigated and evaluated the impact of the incident on listed companies. Although some issuers have business connections with SVB, all of them have confirmed that the related exposures will not affect their operations according to the announcements of relevant issuers and further inquiries by the HKEX. Issuers are also required to make continuing disclosures as needed under the Listing Rules. The HKEX will continue to closely monitor the development of the incident, monitor the situation of issuers, and take corresponding risk management measures.
(3) Currently, the majority of debt securities holdings of Hong Kong's banking sector were measured at market values. Any changes in the market values of these securities have already been reflected in the financial accounts of the banks. Only about a quarter of the debt securities investments were intended to be held to maturity and measured at cost, which represented just around five per cent of the total assets of the banking sector at end-2022. Banks in Hong Kong typically hold a diversified debt securities portfolio, comprising mainly short-term debt securities with a maturity of less than three years. The prices of these debt securities are relatively less affected by interest rate fluctuations. Therefore, the difference between the book value and the market value of these debt securities holdings was small, amounting to less than two per cent at end-2022.
In addition, the HKMA regularly monitors the financial performance and risk appetites of banks, including the levels of their capital adequacy ratio and exposures to liquidity risk and market risk. Banks are required to keep track of the market values of their debt securities portfolios, regardless of how the securities are measured in their financial accounts. In its regular stress testing exercises, the HKMA also assesses the impact of rising interest rates or changes in the market and economic environment on the values of banks' debt securities holdings, with a view to ensuring that banks have adequate capital and liquidity buffers to cope with potential risks. The HKMA considers the overall risks associated with banks' debt securities investment activities to be manageable.
Thank you, President.
Ends/Wednesday, March 29, 2023
Issued at HKT 12:49
Issued at HKT 12:49
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