Hong Kong May Ask Lenders to Set Aside More Reserves on Loan Default Risks
Hong Kong Monetary Authority may ask some banks to set aside more reserves, the latest step by the Chinese city to curb credit growth and prevent loan defaults, after borrowing surged and mortgage rates advanced.
The de-facto central bank will start talks on lenders’ deposit levels to “better absorb the impact of bad debts,” K. C. Chan, secretary for financial services and the treasury, said in a written reply to lawmakers yesterday. HKMA will also ask banks to review lending plans to better manage “concentration risk and liquidity,” he said.
Banks are facing “upward” pressure on lending and deposit rates as credit demand soaks up cash from the financial system, HKMA’s Chief Executive Norman Chan said yesterday. HSBC Holdings Plc (HSBA) and other lenders raised mortgage rates in Hong Kong this month after the central bank in April warned of the risk of a “credit-fueled property bubble.”
“The current pace of loan growth is not sustainable,” said Kevin Lai, an economist at Daiwa Capital Markets in Hong Kong. “The government is clearly concerned about the risks and it keeps warning the market. The situation of ample liquidity may be over soon.”
The local currency loan-to-deposit ratio for Hong Kong banks rose to 81.7 percent by the end of March from 71 percent in early 2010, HKMA said. HSBC said this week that mortgage rates in the city will rise further because of “tightness” in market liquidity.
“Historically, Hong Kong banks tend to maintain a healthy loan-to-deposit ratio,” Benjamin Hung, chief executive of Standard Chartered Plc (2888)’s Hong Kong unit, told reporters in the city today. “In the long run, I don’t think this should be a problem.”
“The HKMA will continue to monitor the international developments on enhancing banking supervisory measures and implement additional measures in Hong Kong if necessary,” said Chan, the financial services secretary.
Hong Kong Chief Executive Donald Tsang said today the government “won’t hesitate” to implement measures to curb home-price gains when necessary.
Home prices have surged about 70 percent since the start of 2009 on record-low borrowing costs, according to Centaline Property Agency Ltd., the city’s biggest privately held real- estate broker. A currency peg to the dollar robs Hong Kong of an independent interest-rate policy as cash spills into the city from mainland China and from monetary easing in developed economies including the U.S.
“As long as the low-interest-rate environment remains unchanged, there would still be risk of an asset price bubble induced by abundant liquidity,” said Chan, the financial services secretary.
Norman Chan yesterday reiterated calls on April 28 that interest rates will rise on capital outflows when the U.S. increases borrowing costs.
Federal Reserve Chairman Ben S. Bernanke signaled last month that the need to contain inflation means further monetary easing in the U.S. is unlikely when $600 billion of Treasury purchases end in June. Capital inflows into Hong Kong amounted to HK$640 billion ($82.4 billion) in the five quarters through December 2009, according to the HKMA.
The city’s central bank asked some lenders to limit loan growth and ensure that it doesn’t exceed the increase in the first few months of this year, Oriental Daily reported today, citing unidentified people.
The banks’ regulator is reviewing funding plans from local lenders and will discuss that with them soon, according to an e-mailed reply from the HKMA.
Home loan charges in the city, which are mostly linked to Hong Kong interbank rates, or Hibor, began climbing at the end of 2010 after shrinking to a record low of 0.89 percent in November, according to mortgage service and data provider mReferral Mortgage Brokerage Services.
HSBC last week said it will raise interest rates for mortgages based on Hibor to 1.5 percentage points to 2 percentage points more than the benchmark, from 1 percentage point to 1.5 percentage points.
To contact the reporter on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net
To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net
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