On November 6, the Hong Kong Monetary Authority (HKMA) announced two refinements to the fifth of five measures introduced on September 30 that provide liquidity assistance to licensed banks in Hong Kong.
The two refinements further ease term funding pressures facing banks and provide assurances to the market about the availability of liquidity in anticipation of banks’ greater demand for funding toward year’s end. The refinements took immediate effect and will remain in force until end-March.
The goal of the five September 30 measures was to inject more liquidity into the banking system. Under the fifth measure, the HKMA was granted authority to lend term money of up to one month to individual licensed banks against collateral. This measure helped encourage lending in the interbank market, and consequently, rates have been gradually easing.
However, concerns about counterparty risk persist, and liquidity in the longer end of the interbank market, especially beyond one month, remains tight. It is under these circumstances that the HKMA decided to introduce the two refinements to the fifth measure.
First, the maximum tenor of such collateralized term lending has been extended from one month to three months. This will better enable banks to secure term money beyond one month and hence reduce funding pressures as the year-end approaches.
Secondly, while the interest rate for such lending continues to be determined with reference to market interest rates, the HKMA will take into account the fact that such lending is secured by collateral in determining the applicable interest rate. The HKMA may lower the lending rate for the term lending facility because of the secured nature of such lending and the current distortions and frictions in the term interbank market.
HKMA Chief Executive Joseph Yam said the refinements were designed to help banks meet their year-end liquidity needs. “The two refinements to the fifth measure, together with the other four measures introduced on 30 September, will help ensure adequate liquidity within the banking system and further ease pressures in the interbank market,” Mr. Yam said.
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