IMF Executive Board Concludes Financial System Stability Assessment with Hong Kong SAR

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Financial System Stability Assessment[1]with Hong Kong SAR on May 21, 2021.

Sound macroeconomic and prudential policies over the years have provided Hong Kong SAR with important buffers to cope with the current slowdown and future shocks. The banking sector remains well capitalized, profitable, and nonperforming loan ratios remain low. Hong Kong SAR’s exchange rate mechanism, the Linked Exchange Rate System (LERS), has continued to support financial stability, and is underpinned by large foreign exchange reserves. In response to the COVID-19 pandemic, the authorities took a multi-pronged approach to support the economy and maintain financial stability.

The FSAP identified the extensive linkages to Mainland China, stretched real estate valuations, and exposure to shifts in global market and domestic risk sentiment, compounded by escalating U.S.‑China tensions, as the main macro-financial risks. Stress tests conducted by the FSAP show that the financial system is resilient to severe macro-financial shocks and the banking system is also resilient to liquidity stress, but there are pockets of vulnerabilities in foreign bank branches, investment funds, households, and nonfinancial corporates. Accordingly, the FSAP made recommendations for enhancing oversight over banking groups with both foreign branches and local subsidiaries in Hong Kong SAR, heightening monitoring of liquidity risk for banks operating with multiple group entities, and ensuring that internal risk models to monitor lending to Mainland China are sufficiently forward looking.

The institutional framework for macroprudential policies is functioning well, and the current policy stances on real estate and countercyclical capital buffers (CCyB) are appropriate. Nonetheless, there is further scope for strengthening systemic risk monitoring, improving communication, and bringing non-bank mortgage lending within the regulatory ambit.

Banking supervision and regulation remain strong overall and with respect to cross-border linkages and housing risks, but continued attention and review is needed in regard to competing priorities and the adequacy of supervisory resources. The establishment of the Insurance Authority has greatly strengthened insurance regulation and the supervision of both insurers and intermediaries. The regulatory and supervisory framework for securities trading systems has been strengthened since the 2014 FSAP, as also supervisory coordination with the Mainland.

Crisis management arrangements have been significantly strengthened by the introduction of a comprehensive resolution regime under the Financial Institutions Resolution Ordinance (FIRO) in 2017. Updating some aspects of the depositor protection regime, including the scope of depositor preference, the mandate of the Deposit Protection Board, and reviewing the size of the Deposit Protection Scheme fund would ensure full consistency with the FIRO.

The FSAP examined the authorities’ active role in promoting Fintech and recommended adopting a more proactive cross-sectoral approach as Fintech pervades across activities. The FSAP welcomes the authorities’ plan towards climate-related mandatory disclosures, the Common Ground Taxonomy, and risk assessments.

Executive Board Assessment[2]

Executive Directors broadly agreed with the thrust of the recommendations in the 2021 Financial System Stability Assessment (FSSA). Noting the substantial macro-financial challenges that Hong Kong SAR’s economy has faced over the past two years on both the domestic and external fronts, they recognized the resilience of its financial sector, underpinned by sound policies, ample buffers, and strong oversight. Looking ahead, Directors considered that the main macro-financial vulnerabilities relate to stretched real estate valuations and exposure to shifts in global market and domestic risk sentiment. Most Directors also mentioned risks associated with extensive linkages with Mainland China, with a few Directors highlighting also the long-term benefits from such linkages.

Directors welcomed the banking system’s resilience to severe macro-financial shocks under the stress tests, but also noted pockets of vulnerability in the corporate, household, and investment fund sectors. To further strengthen resilience, they encouraged monitoring households’ debt repayment capacity at a disaggregated level, strengthening data collection, and bringing nonbank mortgage lending within the regulatory framework.

Directors welcomed the strengthening of supervisory and crisis management frameworks since the 2014 FSAP. They agreed that banking supervision and regulation remains strong, but broadly encouraged enhancing oversight and liquidity risk monitoring of banking groups with both local subsidiaries and foreign branches. While noting that Hong Kong SAR’s macroprudential policy framework is functioning well and that the current policy stances on real estate and countercyclical capital buffers are appropriate, Directors saw scope for further strengthening systemic risk assessment and communication. Many Directors also supported providing de jure operational independence to the Hong Kong Monetary Authority. Directors generally underscored the importance of continuing to strengthen regulation and preserving the rule of law to maintain a solid foundation for competitiveness as an international financial center.

Directors welcomed the authorities’ strategic prioritization of policies to combat the risks of climate change, including through mandatory disclosures, the Common Ground Taxonomy, and risk assessments.

Directors welcomed the authorities’ active role in promoting Hong Kong SAR as a fintech hub in Asia, and encouraged continued coordinated efforts among the regulators to guide a proactive and consistent cross-sectoral approach. They encouraged the authorities to continue improving the solid AML/CFT regime.



[1]The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth assessment of a country’s financial sector. FSAPs provide input for Article IV consultations and thus enhance Fund surveillance. FSAPs are mandatory for the 47 jurisdictions with systemically important financial sectors and otherwise conducted upon request from member economies. The key findings of an FSAP are summarized in a Financial System Stability Assessment (FSSA).

[2]At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: https://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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