The HKMA already has the ability to take many of the actions to relieve stress in the financial system that are being taken or considered in the developed markets.
Readers may have noticed the release of the Report on Enhancing Market and Institutional Resilience by the Financial Stability Forum recently. The Report was the outcome of a detailed study by the Forum following a request from the G-7 Ministers and Central Bank Governors in October last year "to undertake an analysis of the causes and weaknesses that have produced the turmoil and to set out recommendations for increasing the resilience of markets and institutions going forward".
As a member of the Financial Stability Forum, I had the opportunity to take part in recent meetings to discuss the causes of and the remedies for the current crisis, and examine drafts of the Report. I have also written a number of Viewpoint articles on some of the subjects to promote understanding in the community of what is going on in the developed financial markets. I recommend the Report to everyone who has an interest in international finance, although I fear many may have already grown tired of reading about sub-prime mortgages. But the possibility that Hong Kong, as an international financial centre, might face similar problems in the future still exists, and, because the maintenance of the status of Hong Kong as an international financial centre is something specified in the Basic Law, it is important for all of us to develop a deeper understanding of the issues at hand in the developed markets and draw lessons for the future, whether or not we have been affected this time. We in the HKMA have already started examining the recommendations of the Forum and their relevance to our financial system.
Many of the recommendations of the Financial Stability Forum require further deliberation by international financial institutions, including the standard-setting bodies such as the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, the International Monetary Fund and the Financial Stability Forum itself. We will continue to be involved, monitoring developments relevant to us, expressing our views and sharing our experience where appropriate. There are, nevertheless, many recommendations that can be given early consideration at the level of individual jurisdictions, for example in the areas of strengthening the authorities’ responsiveness to risks and developing robust arrangements to deal with stress in the financial system. Some of these recommendations have already been receiving our close attention for some time as part of our continuing work in maintaining monetary and financial stability in Hong Kong and we will draw references from the Report.
One interesting example of these recommendations concerns central bank operations. As readers may have noticed, with the financial system in the US under considerable stress, the Federal Reserve Bank of New York has introduced new avenues for providing liquidity to the system. These include lending for longer terms against a wide range of collateral and to non-bank financial institutions, as opposed to the past practice of lending only short term (overnight) against government securities and only to banks. Given that financial systems may, from time to time, come under stress so intense that it may disrupt financial intermediation, which is crucial to economic activities, central banks clearly have a responsibility to relieve the stress and ensure the continuous functioning of the financial system. The Financial Stability Forum specifically recognised this important responsibility and recommended that "central bank operational frameworks should be sufficiently flexible in terms of potential frequency and maturity of operations, available instruments, and the range of counterparties and collateral, to deal with extraordinary situations".
In Hong Kong, we have a transparent and detailed policy on the role of the Hong Kong Monetary Authority as the lender of last resort. I think we are probably one of only a few jurisdictions that set out their lender-of-last-resort policies so clearly. The policy statement was first issued in June 1999 and has been continually updated. It is available on our website. Readers may notice that, at least in terms of collateral and maturity, our operational framework already has the kinds of capability recommended by the Financial Stability Forum and is in line with the measures recently introduced by the Federal Reserve. We have also set out the haircuts for a wide range of securities that we accept as collateral. However, we will consider carefully the recommendations in the Financial Stability Forum's report to see if further improvements can be made.
Joseph Yam
17 April 2008
Click here for previous articles in this column.
Document in Word format
