The skyline of Central. HKMA's Deputy Chief Executive Arthur Yuen said that credit loan growth this year is relatively strong compared with the last few years. Mike Clarke / AFP

HKMA warns increase could pose systemic risks to banking system

The Hong Kong Monetary Authority (HKMA) said Friday that local banks total lending grew 26 percent in the first nine months of 2010 and may pose a systemic risk to the sector.

However, it said it would not implement the anti-cyclical capital buffer it signed up to under the Basel III agreement in September. Although mandatory, its implementation is not required until 2013.

HKMA Deputy Chief Executive Arthur Yuen made the remarks Friday at the Hong Kong Association of Banks' (HKAB) last regular meeting of the year.

Yuen said that credit loan growth for the year is relatively strong compared with the past few years. He added that loan growth in some industries is higher than average and a major source of it is in mortgage loan approvals.

"The HKMA will devote more regulatory resources to tackle the situation next year," Yuen said. "For example, we will conduct more on-site examinations to track the uses of these credit loan approvals. All we do is ensure that local banks take a prudent approach to loan approvals and credit provision."

Yuen stressed that judging by international experience; robust credit growth generally results from lax standards in a loan approval procedure that bestows systemic risks on the whole banking system.

Nevertheless, Yuen said that the banking regulator does not intend to implement the counter cyclical capital buffer for local banks in 2011.

The Basel Committee on Banking Supervision announced in September that global banks should adopt a counter cyclical capital buffer of 2.5 percent to help them absorb any future stresses.

Benjamin Hung, HKAB chairman, attributed strong credit growth in the city this year to the low comparison base in 2009, sturdy credit growth on the mainland, local banks' willingness to lend to the small and medium enterprises and the local low interest rate environment.

However, Hung said that credit loan growth in 2011 will slow down compared with 2010.

"The HKAB is of the opinion that the regulator should monitor the loan approval process in the city though local banks have not been too aggressive in the lending business as the average loan-to-deposits ratio for local banks stands below 60 percent," Hung said, adding that the gearing ratio for both local corporations and families are low.

Meanwhile, Hung also briefed the media on the latest developments in the local yuan business.

"Local yuan deposits have registered tremendous year-on-year growth of 280 percent as of the end of October.The HKAB believes that burgeoning growth of local yuan deposits will help enhance the future diversification of various yuan investment products in the city as the pool of yuan capital can sustain the development of yuan financial products," Hung said.

China Daily

(HK Edition 12/18/2010 page2)