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institutions in Hong Kong has been withdrawn with immediate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The guideline is being withdrawn because it is less relevant to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appropriate that it should be withdrawn," said Mr David Carse,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
