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515.5995

Guidelines & Circulars

31 March 2009

The Chief Executive
All authorized institutions

Dear Sir / Madam,

Provision of Liquidity Assistance to Banks

As you are aware, the Hong Kong Monetary Authority (HKMA) announced on 26 March 2009 the outcome of its review of the five temporary measures for providing liquidity assistance to banks. The purpose of this letter is to draw your attention to the arrangements which will take effect following the expiry of the temporary measures on 31 March 2009.

By way of background, the HKMA announced at the end of last September five temporary measures for providing liquidity assistance to licensed banks for a period of six months until the end of March 2009 (http://www.info.gov.hk/hkma/eng/key-information/press-releases/2008/20080930-4.shtml). This was followed by the announcement of two refinements to the temporary measures in early November (http://www.info.gov.hk/hkma/eng/key-information/press-releases/2008/20081106-3.shtml).

The HKMA's review of the temporary measures, now completed, noted that the temporary measures have been effective in relieving the stress in the local interbank market since September last year. Although utilisation of these temporary measures has declined in recent months with the stabilisation of the local market, it is important that continued assurance should be given to banks that liquidity will be available to them in case of need, in view of the fact that international financial markets have not yet completely returned to normal.

Against this background, the HKMA has announced that it will continue to conduct foreign-exchange swaps and term repo transactions under its market operations to provide Hong Kong-dollar liquidity assistance to licensed banks, if needed, after the expiry of the temporary measures. As for the measures relating to the use of the Discount Window, since there was no demand for

these measures in the past six months, the HKMA has decided that it will resume the normal operation of the Discount Window (that is, using only Exchange Fund paper for overnight repo) which existed before the introduction of the temporary measures in order to safeguard currency stability under the Currency Board System.

Determination of the Base Rate

Another arrangement for providing liquidity assistance to licensed banks, introduced on 8 October 2008, is the adjustment to the methodology for determination of the Base Rate. Prior to the adjustment, the Base Rate was set at either 150 basis points above the prevailing US Federal Funds Target Rate (FFTR) or the average of the five-day moving averages of the overnight and one-month HIBORs, whichever was higher. After the adjustment, the spread of 150 basis points above the prevailing FFTR was reduced to 50 basis points. In addition, the other leg relating to the moving averages of the relevant interbank interest rates (the "HIBOR leg") was removed from the formula with effect from 9 October 2008 until the end of March 2009.

The HKMA has reviewed the appropriateness of these adjustments and has decided that the smaller spread of 50 basis points will be retained, and that the HIBOR leg will be reinstated after the end of March 2009 to allow the functioning of interest rate adjustment under the Currency Board system as necessary.

Refinement of the LOLR Policy Statement

The HKMA has also taken the opportunity of the current review to strengthen the Lender of Last Resort (LOLR) framework for individual authorized institutions under liquidity stress. As a result of this review, the LOLR Policy Statement has been amended to expand the types of assets and facilities eligible for obtaining Hong Kong-dollar liquidity:

(i) foreign exchange swaps will be incorporated as one of the basic instruments which would be used by the HKMA to provide LOLR support;

(ii) the definition of eligible securities for repos will be expanded to include securities in foreign currencies (with acceptable ratings); and

(iii) as one of the basic instruments that would be used by the HKMA to provide LOLR support, provision of credit facilities will become available against security of placements with other banks which are acceptable to the HKMA. This is in addition to the original arrangements that allow only residential mortgages as collateral.

In addition, the HKMA has also revised the cap which the HKMA will normally be prepared to provide LOLR support for individual institutions from HK$10 billion to HK$25 billion to reflect the increase in the capital base of locally incorporated authorized institutions over the past decade. Specific prior approval of the Financial Secretary will be required if it is considered necessary to provide funding support in excess of the cap. The revised LOLR Policy Statement is available on the HKMA website (http://www.info.gov.hk/hkma).

In case you have any questions regarding the above, please do not hesitate to approach your usual supervisory contacts at the HKMA.

Yours faithfully,

Nelson Man
Executive Director
(Banking Supervision)

c.c.
Chairman, Hong Kong Association of Banks
Chairman, Hong Kong Deposit-taking Companies Association
Last revision date: 1 August 2011
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