Banks in Hong Kong Told To Conduct Stress Tests

Sources:
Bloomberg: Hong Kong Banks Told To Hold Stress Tests Assuming $89 Billion In Outflows
ChinaDaily: HKAB: Banks May Slow Credit Growth
FT: Hong Kong Tests Banks’ Ability To Survive Outflows
Market Watch: Hong Kong Banks Asked to Conduct Stress Tests

Hong Kong banks will conduct another stress test to see whether they could withstand capital outflows of HK$650 billion ($83.52 billion) in customer deposits. Since late 2008, the amount of deposits in Hong Kong banks has grown rapidly by HK$1.38 trillion ($177 billion). As liquidity is tightening and the United States may soon raise interest rates, the Hong Kong Monetary Authority (HKMA), the de facto central bank, requested banks to test whether they could survive if customers withdrew half of such new deposits in six to twelve months. “When the US ends its quantitative easing, monetary policy and global liquidity will tighten, and this may cause more fund outflows in Hong Kong,” said Paul Lee, an analyst at Haitong International Group.

The request for stress tests reflects the HKMA’s concerns about the health of Hong Kong banks as banks have rapidly expanded lending. Loans have grown by 30 percent from January to March this year. The loan growth has also driven the loan-to-deposit ratio up from 71 percent to 81.7 percent in a year since early 2010. In the case of smaller banks, the loan-to-deposit ratio has grown up to 90 to 100 percent. High interest rates in mainland China has contributed to the loan growth in Hong Kong banks as more Chinese firms have borrowed loans from Hong Kong banks at lower interest rates. The central bank in China has increased interest rates four times since last October in an attempt to control inflation and reduce loan growth. It also has raised reserve requirements eight times during the same period.

It is notable that recently, the portions of renminbi deposits and loans in US dollars in Hong Kong banks have surged, reflecting the expectation that the value of the renminbi will likely go up against the US dollar in the future. During the last two quarters, renminbi deposits have increased three times up to 452 billion yuan ($69 billion). Loans in foreign currency, mostly in US dollars, have increased by 54 percent during the first quarter this year.

The HKMA will receive the test results from banks in a month. While some predict that banks that fail the test will reduce lending, others say that the test results will not immediately change banks’ lending policy as the bank’s “risk management policy, regulatory requirements and the cost of capital of different banks” determines the banks' lending criteria.