Blog: IMF Reaffirms Hong Kong Stability, Identifies Pockets of Risk – Regulation Asia

The IMF recommends enhancing monitoring of lending to Mainland China, increasing oversight over banking groups, and regulating mortgage lending by non-banks.

The IMF (International Monetary Fund) has issued its latest Financial System Stability Assessment (FSSA) Report on Hong Kong, following an assessment conducted under the Financial Sector Assessment Program (FSAP).

“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 IMF said. “The banking sector remains well capitalised, profitable, and nonperforming loan ratios remain low.”

The report also notes that Hong Kong’s exchange rate mechanism, underpinned by large foreign exchange reserves, has continued to support financial stability.

The FSAP identifies the extensive linkages to Mainland China, stretched real estate valuations, and exposure to shifts in global market and domestic risk sentiment as the main macro-financial risks for Hong Kong. These risks are compounded by escalating US‑China tensions, it said.

While 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, the report highlights “pockets of vulnerabilities” in foreign bank branches, investment funds, households, and nonfinancial corporates.

The FSAP recommends enhancing oversight over banking groups with both foreign branches and local subsidiaries in Hong Kong, 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.

With regard to Hong Kong’s institutional framework for macroprudential policies, which the report says is functioning well, there is further scope for strengthening systemic risk monitoring, improving communication, and bringing non-bank mortgage lending within the regulatory ambit.

HKMA (Hong Kong Monetary Authority) Deputy Chief Executive Arthur Yuen has recently indicated that the central bank is currently considering extending its regulatory perimeter to cover mortgage lending by non-bank institutions such as finance companies and property developers.

The IMF report says banking supervision and regulation in Hong Kong remain strong overall, including with respect to cross-border linkages and housing risks, but that continued attention and review is needed in regard to competing priorities and the adequacy of supervisory resources.

While welcoming Hong Kong authorities’ active role in promoting the city-state as a fintech hub, the FSAP recommends the adoption of a more proactive cross-sectoral approach. To date, the focus has mostly been on banks.

In a statement, the Hong Kong government has welcomed the release of the IMF report, saying it reaffirms the city’s position as an international financial centre with a resilient financial system, sound macroeconomic and prudential policies, and robust regulatory and supervisory frameworks.

“The positive appraisal of our financial system is a clear recognition of the Government’s long-standing efforts to safeguard financial stability, which is underpinned by sound policies as well as robust institutional frameworks and market infrastructures,” said Hong Kong Financial Secretary Paul Chan.

“We will continue to reinforce our core strengths, give full play to our unique advantages and identify new areas of growth, with a view to ensuring the long-term competitiveness and prosperity of Hong Kong.”

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