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Clarifying Some Misconceptions on the Credit Risk Faced by the Banking Sector in Hong Kong


According to a report recently published by a credit rating agency, Hong Kong’s private-sector credit/GDP ratio has been above trend and Hong Kong is one of three markets globally that are most vulnerable to macro-prudential risk.  The report also highlights increasing linkages and exposures of Hong Kong’s banking system to the Mainland, and claims that maintaining independent and prudent oversight of banks’ Mainland expansion has become more challenging as the HKMA relies on coordination with Mainland authorities when supervising these activities.  The above arguments lack objective basis, and we feel the need to clarify some misconceptions. 

Misconception 1 – Hong Kong’s private-sector credit/GDP ratio is relatively high, suggesting high macro-prudential risk

  • This kind of misconception is commonly seen in analyst reports.  There are two problems with this argument.  First of all, Hong Kong is an international commercial and financial centre.  Many multinational corporates conduct their operations and financing in Hong Kong.  The “domestic” credit extended to corporates by our banking sector is not entirely for use in Hong Kong.  Therefore, when calculating the private-sector credit/GDP ratio, the “numerator” will be overstated.  As the “denominator” is based on the GDP of Hong Kong, the ratio so calculated will be exaggerated.  In contrast, the same ratio for other economies is calculated using nationwide GDP as the denominator.  Take London as an example, which is an important financial centre of the UK.  Credit extended to corporates by banks in London is not only for use in Greater London.  If we are to calculate London’s private-sector credit/GDP ratio based on its own GDP, the ratio will also be significantly higher, just like the case for Hong Kong. 
  • Second, in order to evaluate Hong Kong’s macro-prudential risk, one should take into account the regulatory authority’s policy response and the robustness of the banking system.  Banks’ credit risk management has always been the HKMA’s supervisory focus.  Specific measures introduced by the HKMA in the past few years include regular onsite and thematic examinations of banks to ensure that they are conducting their lending business prudently.  The HKMA also carries out stress-testing on banks regularly to make sure that Hong Kong’s banking system has sufficient capital and liquid assets to withstand shocks arising from a turn in the economic and credit cycles.  In addition, the HKMA has introduced a series of macro-prudential measures including eight rounds of countercyclical measures for property mortgage loans and the implementation of the countercyclical capital buffer requirement.  These policy responses have greatly enhanced the resilience of Hong Kong’s banking system.
  • In fact, the effectiveness of banking supervisory work in Hong Kong is well-reflected in four indicators of the banking sector – profitability, capital adequacy ratio, classified loan ratio and liquidity coverage ratio.  Locally incorporated banks achieved a return-on-equity of 11.7% and an average capital adequacy ratio of above 19%, while the classified loan ratio was only 0.67% and the liquidity coverage ratio is above 150%.  These figures show that Hong Kong’s banking system is very safe and sound and does not in any way fall behind other financial centres.
  • Asserting that Hong Kong is one of three markets globally that are most vulnerable to macro-prudential risk purely based on Hong Kong’s seemingly high private-sector credit/GDP ratio is therefore clearly a generalisation without a sound basis.  Such a conclusion ignores the policy response of the regulatory authority, as well as the evidence that Hong Kong banks are among the top in international ranking in terms of actual banking sector soundness statistics and indicators.


Misconception 2 – Increasing Mainland exposures of Hong Kong banks pose risk

  • As the Mainland economy has been growing briskly in recent years, coupled with the ‘going out’ strategy of Mainland enterprises, the demand for bank lending has increased.  It is only natural that Hong Kong, being an international financial centre, provides an effective financing platform to meet the funding needs of Mainland enterprises.  This also provides an important impetus for business growth in the local banking sector.
  • Let’s focus on the specific details of Mainland exposures of Hong Kong banks.  As at the end of 2017, total outstanding Mainland-related lending of local banks was HK$4.2 trillion.  Of this, 41% was lent to Mainland state-owned enterprises (mostly central state-owned enterprises), 35% to local and foreign companies investing on the Mainland, and the remaining 24% to Mainland private entities.  When vetting and approving Mainland-related loan applications, banks in Hong Kong have always adopted prudent underwriting standards and, where necessary, will require borrowers to provide guarantees or collaterals to mitigate risk.  As mentioned earlier, the HKMA has stepped up its supervisory efforts on banks’ credit risk management over the past years.  It is no mere coincidence that the classified loan ratio of Hong Kong banks' Mainland-related lending has remained below 1% in the past five years.  Rather, it underscores the positive outcome of banks’ prudential operations under HKMA’s supervision.
  • Asserting that local banks face high risk simply based on a relatively high ratio of Mainland exposures reflects a lack of understanding about the Mainland economy and Hong Kong banks’ risk management experience accumulated over the past two decades.


Misconception 3 – The HKMA has to rely on Mainland supervisory authorities for its oversight of Hong Kong banks’ operations on the Mainland, losing independence of its supervisory work

  • On the supervision of banks' cross-border business, the Basel Committee’s international standards require that supervisory authorities should work closely together to avoid supervisory gaps.  The HKMA has been maintaining close contact and dialogue with the US Federal Reserve, the Bank of England and the European Central Bank in respect of supervision of banks from the US and Europe.  Likewise, we have been working closely with the China Banking and Insurance Regulatory Commission when supervising Mainland banks.  Supervisory dialogue and co-operation does not mean any compromise in the HKMA’s regulatory powers or independence in overseeing foreign banks’ operations in Hong Kong or the overseas operations of Hong Kong’s locally incorporated banks.
  • Take the HK$4.2 trillion worth of Mainland-related lending as an example.  It includes lending by Hong Kong branches of foreign banks to Mainland enterprises, as well as lending by Mainland subsidiaries of locally incorporated banks.  The HKMA conducts direct supervision on the credit risk management of Hong Kong banks, including requiring banks to follow prudent lending principles in the conduct of their business and report loan statistics in accordance with the HKMA's loan classification requirements.  In case any weaknesses or deficiencies in the risk management of individual banks are detected, the HKMA has the power to require the banks concerned to take remedial actions.  These are well-known facts within our banking community.  Thus, any saying about weakening independence of the HKMA’s supervisory work as a result of its supervisory co-operation with Mainland supervisory authorities reflects a lack of comprehensive understanding of the international practices on cross-border supervisory co-operation.


Arthur Yuen
Deputy Chief Executive
Hong Kong Monetary Authority

16 May 2018

Last revision date: 16 May 2018
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