While Hong Kong’s banking sector does not have a high level of exposure to European countries with severe sovereign debt problems, the global financial markets may still adversely impact Hong Kong's banking sector.
Secretary for Financial Services & the Treasury Prof KC Chan told legislators that the aggregate exposure of Hong Kong’s banking sector to European countries facing serious sovereign debt problems - including Greece, Ireland, Italy, Spain and Portugal - is less than 1% of the sector’s total assets. This risk exposure will not give rise to capital
financing needs by local banks.
For the insurance sector, exposure of authorised insurers in Hong Kong to Greek debt is less than 0.1% of their total investment, according to the Office of the Commissioner of Insurance. The impact of the European debt crisis on the overall stability of the Hong Kong insurance industry is therefore insignificant.
Although banks in Hong Kong do not have significant exposure to debts issued by European countries facing sovereign debt problems, Prof Chan said the banking sector may suffer from the negative spillover in the event that fiscal problems of some European countries will lead to heightened risk aversion and trigger capital outflows from emerging markets or liquidity squeeze in the interbank market.
He said two scenarios might occur if the European debt crisis deteriorates further - banks may become reluctant in lending to each other amid the concerns over counterparty credit risk, leading to tightened liquidity in the interbank market; and heightened risk aversion will result in massive capital outflows from the emerging markets, causing considerable exchange-rate and interest-rate volatility.
He said the Monetary Authority will continue to monitor banks’ risk exposure through its day-to-day supervision, and has requested banks strengthen risk management and maintain adequate capital and liquidity to address the potential systemic risk arising from the global financial turmoil.
To address the potential credit crisis arising from the global financial market turmoil, the Monetary Authority stands ready to provide liquidity assistance to individual banks if needed and on a case-by-case basis, through the use of foreign-exchange swaps and term repos.
If the Hong Kong dollar exchange rate falls and reaches the weak-side convertibility undertaking level due to massive capital outflows under heightened risk aversion, theMonetary Authority will conduct operations under the Currency Board arrangements, using the foreign reserves accumulated from inflow of capital earlier as a buffer to maintain exchange-rate stability and mitigate excessive interest-rate volatility.
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