IMF applauds HK's resilience and buffers

Finance | Victor Zhong 10 Jun 2021

Sound macroeconomic and prudential policies over the years have provided Hong Kong with important buffers to cope with the current slowdown and future shocks, the International Monetary Fund said in a report yesterday.

The banking sector remains well capitalized, profitable and nonperforming loan ratios remain low, the report said.

Meanwhile, Hong Kong's exchange rate mechanism, the Linked Exchange Rate System, 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, according to the IMF.

The LERS has ensured that the Hong Kong dollar exchange rate remains stable within a band of HK$7.75-7.85 to one US dollar since 1983.

Stress tests conducted by the IMF's Financial Sector Assessment Program showed 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 non-financial corporates.

To that end, the IMF suggested enhancing supervision of banking groups with both foreign branches and local subsidiaries in the city, heightening liquidity risk monitoring for banks operating with multiple group entities and ensuring that internal risk models that monitor lending to the mainland 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 are appropriate, IMF said, adding that there is further scope for strengthening systemic risk monitoring, improving communication and bringing non-bank mortgage lending within the regulatory ambit.

The Hong Kong government welcomed the IMF's report which reaffirms Hong Kong's position as an international financial center.

Financial Secretary Paul Chan Mo-po, said in a statement that the government will continue to reinforce Hong Kong's core strengths, give full play to its unique advantages and identify new areas of growth, with a view to ensuring the long-term competitiveness and prosperity of the city.

The government and financial regulators will study IMF's suggestions carefully and take them forward as appropriate.

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