Guide to Hong Kong Monetary, Banking and Financial Terms

An agreement reached in July 1988 between the Financial Secretary, as the Controller of the Exchange Fund, and the Hongkong and Shanghai Banking Corporation Limited (HSBC), as the Management Bank of the Clearing House of the Hong Kong Association of Banks. The agreement required HSBC to open an account with the Exchange Fund. The balance in that account could only be altered by the HKMA, (or its predecessor, the Office of the Exchange Fund). The Accounting Arrangements required HSBC to manage the Net Clearing Balance (NCB) of the rest of the banking system, having regard to the level of the balance of HSBC's account with the HKMA. If the NCB exceeded the balance, the HKMA would charge HSBC punitive interest on the excess amount, which represented the sum that HSBC had over-lent to the rest of the banking system. If the NCB was negative, a punitive interest rate would also be charged on the debit balance. The Accounting Arrangements came to an end with the introduction of the Real Time Gross Settlement system in December 1996, which requires all banks to maintain a clearing account with the HKMA.

The total net profit earned by an entity as an on-going business. The Accumulated Surplus of the Exchange Fund is the total net profit earned by the Exchange Fund since 6 December 1935.

A component (other than Common Equity Tier 1 capital) of an authorized institution’s Tier 1 capital, which is intended to absorb losses of an authorized institution on a going concern basis. It includes capital instruments issued by an authorized institution that meet the qualifying criteria set out in Schedule 4B to the Banking (Capital) Rules, share premium resulting from the issue of Additional Tier 1 capital instruments and the amount of minority interests arising from Additional Tier 1 capital instruments issued by consolidated bank subsidiaries of the authorized institution and held by third parties.

The sum of balances in the clearing accounts and reserve accounts kept with the central bank. In Hong Kong, this refers to the sum of the balances in the clearing accounts kept with the HKMA. The Aggregate Balance is a part of the Monetary Base. Since June 1998, the HKMA has been disclosing forecast changes in the Aggregate Balance attributable to the HKMA's foreign exchange transactions as well as issuance of and interest payments on Exchange Fund paper on a real time basis through Reuters and Bloomberg.

See also Currency Board System and Linked Exchange Rate System.

An Ordinance that:
(a) provides for the imposition of requirements relating to customer due diligence and record-keeping on specified financial institutions and designated non-financial businesses and professions;
(b) provides for the powers of the relevant authorities and regulatory bodies to supervise compliance with those requirements and other requirements under the AMLO;
(c) provides for the regulation of the operation of a money service and the licensing of money service operators;
(d) provides for the regulation of the operation of a trust or company service and the licensing of trust or company service providers;
(e) establishes a review tribunal to review certain decisions made by the relevant authorities under the AMLO; and
(f) provides for incidental and related matters.

Interest rate arbitrage: Activities that seek to profit from the deviation between the interest rate differential and interest equivalent of the spread between the forward exchange rate and spot exchange rate. In a broader context, interest rate arbitrage activities may seek to take advantage of the interest rate differential between two currencies. Funds may be switched from one currency to another until the interest rate gap reflects the expected appreciation or depreciation of one currency against the other.

Currency note arbitrage: Activities that seek to profit from the deviation between the official exchange rate applicable to the issue and redemption of banknotes and the market exchange rate. For example, when the market exchange rate is stronger than the official exchange rate, banks can buy foreign currency in the foreign exchange market, surrender it to the Currency Board in exchange for domestic currency at the fixed exchange rate, and thereby make a profit from the differential between the two rates.

A regional macroeconomic surveillance organization, established under the Chiang Mai Initiative Multilateralisation (CMIM) Agreement, to support the implementation of CMIM, and monitor the macroeconomic and financial soundness of all CMIM parties.

Established in 1989, the goal of APEC is to advance Asia-Pacific economic dynamism and sense of community. Hong Kong is a member of APEC and HKMA representatives attend the APEC meetings for finance and central bank officials.

An inter-governmental organisation, consisting of over 40 member jurisdictions in the Asia Pacific region, focused on ensuring that its members effectively implement the international standards against money laundering, terrorist financing and proliferation financing related to weapons of mass destruction. The APG is one of the nine FATF-style regional bodies which are the associate members of the FATF. Hong Kong was one of the founding member of the APG in 1997.

A fund initiated by the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP) in 2002, with the aim of broadening and deepening regional and domestic bond markets in Asia. The ABF consists of two phases. In June 2003, EMEAP launched the first phase (ABF1), which invests in a basket of US dollar-denominated bonds issued by Asian sovereign and quasi-sovereign issuers in eight EMEAP economies (China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand). Building on the success of ABF1, EMEAP has worked to extend the ABF concept to bonds denominated in local currencies. It announced the launch of the second phase of ABF (ABF2) in December 2004.

ABF2 comprises the ABF Pan Asia Bond Index Fund (PAIF) and eight Single-Market Funds. The PAIF is a single bond fund investing in sovereign and quasi-sovereign local currency-denominated bonds issued in eight EMEAP markets. The eight Single-Market Funds will each invest in sovereign and quasi-sovereign local currency-denominated bonds issued in the respective EMEAP markets. The Single-Market Fund of Hong Kong, the ABF Hong Kong Bond Index Fund, is the first ever bond exchange-traded fund in Asia. Both the ABF Hong Kong Bond Index Fund and the PAIF are listed on the Stock Exchange of Hong Kong.

A multilateral development finance institution founded in 1966 by 31 member governments to promote the social and economic progress of the Asia-Pacific region. It now has 65 members - 47 from within the region and 18 from outside. Hong Kong has been a member of the ADB since 1969. The HKMA is responsible for matters relating to Hong Kong's participation in the ADB. HKMA officials attend the ADB's Annual Meetings and contribute to discussions on policy issues of common interest. Under the name "Hong Kong, China", the HKMA has continued to participate actively in the ADB's activities after 1 July 1997.

A description of the degree of financial strength and risk in a bank's assets, typically loans, investments, placements, and off-balance sheet items. Asset quality is normally measured by the level of a bank's classified assets, as well as overdue and rescheduled assets. The higher the level of classified assets and overdue and rescheduled assets, the lower the asset quality of a bank.

See also Loan Classification System.

A Sub-Committee established under the Exchange Fund Advisory Committee to review and report on the HKMA's financial reporting process and the adequacy and effectiveness of the internal control systems of the HKMA. The Sub-Committee reviews the HKMA's financial statements, and the composition and accounting principles adopted in such statements. It also examines and reviews with both the external and internal auditors the scope and results of their audits.

An institution authorized under the Banking Ordinance to carry on the business of taking deposits. Hong Kong maintains a Three-tier Banking System, which comprises banks, restricted licence banks and deposit-taking companies. Authorized institutions are supervised by the HKMA.

The main device under a Currency Board System for maintaining currency stability. Under Hong Kong's Currency Board System, when banks sell US dollars to the HKMA, the inflow of funds causes the Aggregate Balance, and hence the Monetary Base, to expand. This expansion takes place because, in settling the deals, the HKMA credits the clearing accounts of these banks with the Hong Kong dollars required for settlement. Conversely, when banks sell Hong Kong dollars to the HKMA, the HKMA debits the clearing accounts of these banks, causing the Aggregate Balance, and hence the Monetary Base, to shrink. The expansion or contraction of the Monetary Base causes domestic interest rates to fall or rise respectively, thus creating the market conditions necessary to counteract the initial capital flows and restore exchange rate stability.

See also Linked Exchange Rate system.

An internationally recognised framework for assessing the Capital adequacy, Asset quality, Management, Earnings and Liquidity of banks. The primary purpose of CAMEL is to help identify institutions whose weaknesses require special supervisory attention. The overall rating is expressed on a scale of one to five in ascending order of supervisory concern: "1" indicates the highest rating and least degree of concern; "5" represents the lowest rating and highest degree of concern. The HKMA has adopted the CAMEL rating system to assess the financial condition and overall soundness of authorized institutions in Hong Kong.

An accord reached by the Basel Committee on Banking Supervision in 1988 (now commonly known as Basel I), which has been applied to Hong Kong since 1989. The Capital Accord sets out the framework for measuring the capital adequacy of banks, by requiring them to hold a minimum level of capital for their exposures to credit risk, expressed as a minimum ratio between a bank's capital base and its risk weighted assets. The Capital Accord promotes soundness and stability in the international banking system and aims at reducing sources of competitive inequality among international banks. It has been revised to address the issues of bilateral netting, multilateral netting and market risks arising from banks' open positions in various financial instruments.

CAR is a collective term referring to the three risk-weighted capital ratios, namely the (a) Common Equity Tier 1 capital ratio; (b) Tier 1 capital ratio; and (c) Total capital ratio, prescribed under Basel III. The ratio is intended to be a measurement of a bank’s capital position in respect of its exposures to credit risk, market risk, operational risk and sovereign concentration risk. The Banking (Capital) Rules made under section 97C of the Banking Ordinance stipulates that locally incorporated authorized institutions must maintain a Common Equity Tier 1 capital ratio of not less than 4.5%, a Tier 1 capital ratio of not less than 6% and a Total capital ratio of not less than 8%, but the Monetary Authority may under section 97F of the Ordinance increase the minimum above ratios applicable to an authorized institution, taking into account the risks associated with the institution. Each locally incorporated authorized institution is assigned a set of minimum ratios on an unconsolidated (solo) basis or on both a consolidated and unconsolidated basis.

The method based on which a locally incorporated authorized institution should calculate its CAR is set out in detail in the Banking (Capital) Rules. The standards set out in the Rules are in line with the international capital standards released by the Basel Committee on Banking Supervision.

Consolidated basis: In the calculation of the consolidated CAR, the consolidated position of the institution covers its local and overseas branches and the subsidiaries specified by the HKMA.

Solo basis: In the calculation of the solo CAR, the combined position of the institution's local and overseas branches is covered.

Capital buffers consist of three components: 1) the capital conservation buffer, 2) the countercyclical capital buffer and, 3) for authorized institutions considered as systemically important by the Monetary Authority, a higher loss absorbency buffer.

The capital buffers, which must be met by Common Equity Tier 1 capital, are intended to bolster resilience of the banking sector against adverse economic developments and, in the case of the higher loss absorbency buffer, to limit potential negative externalities posed by systemically important authorized institutions were they to become non-viable. If any of the capital buffers maintained by an authorized institution is lower than the level prescribed in the Banking (Capital) Rules, the institution will be subject to restrictions on its ability to make distributions so that it can restore the capital buffer to the desired level.

A function carried out by a central counterparty through which financial performance of financial contracts is guaranteed, thereby mitigating the counterparty credit risk faced by the sellers and the buyers of the contracts.

An entity that interposes itself between the buyers and the sellers of financial contracts such that it becomes the buyer to every seller and the seller to every buyer of the contracts for the purposes of clearing and settling the contracts.

A clearing system operated by the HKMA. The CMU comprises computerised clearing, settlement and custodian facilities for Exchange Fund Bills and Notes, bonds issued by the Government of the Hong Kong Special Administrative Region, and debt securities issued by both public and private sector entities.

A certificate issued to designated systems meeting certain criteria specified under the Clearing and Settlement Systems Ordinance. The certificate provides statutory backing to the finality of settlement for transactions made through designated systems by protecting the settlement finality from insolvency laws or any other laws.

Certificates issued by the Financial Secretary under the Exchange Fund Ordinance, to be held by note-issuing banks as cover for the banknotes they issue. The note-issuing banks are required to submit US dollars to the HKMA in return for the Certificates at the rate of HK$7.80 to US$1.

The ratio of the total amount of loans written off during a period to total outstanding amount of loans at the end of that period. This ratio measures the gross credit loss of a loan portfolio over a specified period of time. Charge-off policies vary from institution to institution. For credit card lending, normally, an account will be written off when the receivable has been overdue for more than 180 days or when the ultimate repayment of the receivable is unlikely (e.g. the cardholder is bankrupt or cannot be located). To better assess the asset quality of the credit card lending portfolio, the credit card charge-off ratio should be read in conjunction with the delinquency ratio. The charge-off ratio is annualised, whereas the delinquency ratio is measured by using the period-end position.

The CHATS Optimiser is a system mechanism that settles paper cheques and large-value Clearing House Automated Transfer System (CHATS) payments simultaneously and in an offsetting manner. Paper cheques are settled daily in a bulk run at a specific time by multilateral netting. When the amounts required to settle paper cheque payments are substantial, banks, having known their net cheque settlement positions, may make use of the CHATS Optimiser to make offsetting CHATS payments to their counterparties during the bulk settlement run. This helps the banks to manage their liquidity positions more efficiently and relieves them from the need to sit on substantial amounts of money for meeting their payment obligations in the bulk settlement run.

A regional multilateral arrangement under the aegis of ASEAN+3 to provide US dollar support through currency swaps to participants facing liquidity shortages and/or balance of payments difficulties.

Loans that are classified as "substandard", "doubtful" or "loss" under the HKMA's Loan Classification System.