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Withdrawal of the HKMA's 40% guideline

The Hong Kong Monetary Authority ("HKMA") announced today that its "40% guideline" on the property exposure of authorized institutions in Hong Kong has been withdrawn with immediate effect.

The 40% guideline was introduced at the beginning of 1994 at a time when property lending was rising rapidly. It advised that authorized institutions whose property exposure as a percentage of loans for use in Hong Kong was above the average for the industry as a whole (about 40%) should seek to stabilize or reduce that percentage.

The guideline is being withdrawn because it is less relevant to current market conditions. The property market is no longer overheated and authorized institutions are now being much more restrained in their property lending. While the property exposure of the banking sector remains relatively high, the full disclosure by authorized institutions of their property exposure means that the market is now in a position to form its own judgment about whether the exposure of individual institutions is acceptable. Moreover, institutions now have a greater ability to adjust that exposure through sales of residential mortgages to the Hong Kong Mortgage Corporation. This improves the ability of authorized institutions to manage the risks of their property exposure.

Despite the withdrawal of the guideline, the HKMA believes that authorized institutions should continue to be cautious on property lending, particularly on lending for property development and investment. Institutions should continue to maintain up-to-date internal policies on property lending and to place their own limit on the size of exposure they are prepared to accept. They should also apply prudent lending criteria, including the maximum 70% loan to value ratio on residential mortgage loans. As at present, the HKMA will also continue to monitor the property exposure of individual institutions and to discuss with them at the start of each year the growth in property lending which they are planning to make in the year ahead.

"The 40% guideline has served its purpose and it is now appropriate that it should be withdrawn," said Mr David Carse, Deputy Chief Executive of the HKMA. "This does not remove the need for authorized institutions to manage prudently the risks in their property lending, but an across-the-board guideline on the size of property exposure is no longer the best means of achieving this. Rather, the focus should be on internal risk management by institutions themselves and on the market discipline which can be exerted through public disclosure."

Hong Kong Monetary Authority
28 July 1998

Last revision date: 1 August 2011
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