Liquidity of an authorized institution (AI) is its ability to meet payment obligations as they fall due. Banks must maintain sufficient liquidity to handle daily operational activities such as cash withdrawal from depositors, interbank clearing, repayment of debts, etc.

The liquidity requirements applicable to authorized institutions (AIs) are provided mainly in the Banking (Liquidity) Rules (BLR) issued by the Monetary Authority (MA) under section 97H(1) of the Banking Ordinance.

Under the BLR, AIs designated by the MA as “category 1 institutions” are required to comply with the requirements relating to the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). Usually category 1 institutions are either having significant international exposures or being significant to the general stability of the local banking sector having regard to their size or complexity of business operations.

Other authorized institutions are regarded as “category 2 institutions”, which must comply with the requirements relating to the local Liquidity Maintenance Ratio (LMR). Category 2A institutions in category 2 institutions must also comply with the requirements relating to the local Core Funding Ratio (CFR). The designation of category 2A institutions are based on the business size and the liquidity risk associated with the institution.

Minimum Liquidity Requirement
Category 1 Institutions Category 2 Institutions Category 2A Institutions
100% 100% 25% 25% 75%

The MA has issued a code of practice to facilitate the implementation of the LCR. The Supervisory Policy Manual (SPM) also contains module LM-1 “Regulatory Framework for Supervisory of Liquidity Risk” to provide, among other things, elaborations on the statutory liquidity requirements. In addition, AIs are required to manage liquidity risk according to the guidelines provided in the SPM module LM-2 “Sound Systems and Controls for Liquidity Risk Management”.

Last revision date : 26 August 2019