The Importance of Market Liquidity


23 Apr 2020

The Importance of Market Liquidity

The spread of COVID-19 around the world has severely impacted the global economy and financial markets.  At one point the international financial markets were so stressed that USD liquidity virtually came to a freeze.  USD tightness also affected HKD interbank interest rates and kept them elevated despite the cut in US policy rates, as we explained in an earlier article. Notwithstanding this, the HKD market continued to function smoothly.  To address the many ramifications of the disease, the HKMA has rolled out a series of measures to help the real economy and the financial markets.   We already outlined these measures in yesterday’s article.  Today let me focus on what we have done to make available more liquidity for the banking system to support smooth functioning of various banking activities.

All along the HKMA has in place a range of liquidity facilities for local banks.  They can obtain from us intraday, overnight or term funding according to their needs.  Last August, we updated and restructured these facilities to make them more structured, easier to understand, and hopefully more suited to the needs of banks.  We talked to the banks, arranged drills for them, and encouraged them to use any of these facilities whenever there is a need.  Earlier this month, we issued a circular further clarifying some operational parameters of the Standby Liquidity Facilities, which is part of the liquidity framework.  Our objective is to make sure banks are clear about the working of the facilities, so that they can establish internal policies and procedures for using them as quickly as possible, if they have not already done so.  We will continue to work with the banks in their preparation.  In the circular we also clarified the HKMA’s supervisory expectation for banks in terms of regulatory requirements on liquidity.  While banks should always manage their liquidity risk prudently, they should not get too dogmatic to the extent of hoarding excessive liquid assets at times of stress.  They should make good use of the buffers built up in the good times to help their clients or themselves weather the bad times.

In another move to increase market liquidity, the HKMA recently announced reducing the Exchange Fund Bills issuance amount by a total of HK$20 billion, on a gradual basis from mid-April to mid-May.  The Aggregate Balance will correspondingly increase by HK$20 billion upon completion of the process.  As we have been telling the market and the general public in the past few years, we always stand ready to suitably reduce Exchange Fund Bills issuance sizes to make available HKD liquidity when needed, and that is what we are doing now.  The Aggregate Balance will increase even further to HK$66.8 billion on 24 April, with the triggering of the strong-side Convertibility Undertaking in the past two days due to inflows to the HKD system, leading to the HKMA conducting four transactions as of noon today selling HK$7,711 million to the market in exchange for US dollars.  Such increase will considerably expand the liquidity backstop for banks and ensure that HKD interbank activities will continue to operate smoothly.

We are also mindful of the USD liquidity needs of market participants.  We have been working closely with the US Federal Reserve (Fed) to operationalise our access to their Foreign and International Monetary Authorities (FIMA) Repo Facility, which provides USD funds through repurchase transactions to overseas monetary authorities to alleviate stresses in the global USD interbank markets.  Yesterday we announced the launch of a US Dollar Liquidity Facility to make available the USD liquidity obtained from the Fed to the Hong Kong banking system.  The first tender will be held on 6 May.

The HKMA attaches great importance to ensuring adequate liquidity in the banking system, and that such liquidity is recycled continuously, smoothly and efficiently.  We will continue to closely watch the global and local market situations, and introduce further measures to provide market liquidity if needed.


Howard Lee
Deputy Chief Executive
Hong Kong Monetary Authority

23 April 2020

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Last revision date : 23 April 2020