The Monetary Authority announced today, 27 January 2015, that the countercyclical capital buffer (CCyB) for Hong Kong will be 0.625% with effect from 1 January 2016.
In setting this CCyB rate the Monetary Authority considered a series of quantitative indicators and qualitative information including an “indicative buffer guide” (which is a metric providing a guide for CCyB rates based on the gap between the ratio of credit to GDP and its long term trend, and between the ratio of residential property prices to rentals and its long term trend). The credit and property price gaps remain at elevated levels and a simple mapping from the indicative buffer guide (calibrated against the CCyB range of 0% to 2.5% in the Basel 3 regulatory capital framework) would signal a CCyB of 2.5% at the upper end of the Basel 3 range.
Whilst the indicative buffer guide, as its name suggests, provides a “guide” for CCyB decisions, the determination of a CCyB rate is not a mechanical exercise and, in addition to the indicative buffer guide, the Monetary Authority also reviewed a range of other reference indicators. These included measures of: bank, corporate and household leverage; debt servicing capacity; profitability and funding conditions within the banking sector and macroeconomic imbalances. The information drawn from these sources was, in the view of the Monetary Authority, consistent with the signal from the indicative buffer guide.
The Basel 3 regulatory framework provides for the CCyB to be phased in over a period of 3 years (from 2016 to 2018) becoming fully effective on 1 January 2019. Under this phase-in arrangement, the maximum CCyB under Basel 3 will begin at 0.625% of banks’ risk-weighted assets on 1 January 2016. In line with the Monetary Authority’s general approach to the adoption of the Basel 3 framework, on this first occasion of setting a CCyB, the Monetary Authority has elected to follow the Basel 3 phase-in level for 2016.
“This is an important step in the implementation of the Basel 3 regulatory framework.” Mr Norman Chan, the Monetary Authority, said. “It complements other measures we have already taken to enhance the resilience of our banking system. Authorized institutions are expected to monitor the risks signalled by credit and property market conditions and take them into account in their risk management and capital planning processes.”
Further details of the decision may be found in the Announcement of the CCyB to authorized institutions on the HKMA website.
The CCyB is part of the Basel III regulatory capital framework and is being implemented in parallel by Basel Committee member jurisdictions worldwide. The CCyB has been designed by the Basel Committee to increase the resilience of the banking sector in periods of excess credit growth. The banking sector can then act as a “shock absorber” in times of stress, rather than as an amplifier of risk to the broader economy.
The specific CCyB requirement applicable to a given AI is expressed as a percentage of its CET1 capital to its total risk-weighted assets (RWA). Each AI’s CCyB requirement may vary depending on the geographic mix of its private sector credit exposures and the CCyB rate applicable in each jurisdiction where it has such exposures.
The CCyB, once implemented and triggered, “extends” an AI’s Capital Conservation Buffer (also introduced by Basel III) which is, like the CCyB, being phased-in from 2016 to 2018, beginning with a rate of 0.625% of RWA in 2016 and increasing by equal instalments to reach 2.5% of RWA from 1 January 2019.
The power to implement the CCyB in Hong Kong was provided by the Banking (Capital) (Amendment) Rules 2014, which came into effect on 1 January 2015, giving the Monetary Authority the power to announce CCyB rates applicable to Hong Kong if the Monetary Authority considers that a period of excessive credit growth in Hong is leading to a build-up of system-wide risks in the financial system of Hong Kong.
As an initial reference for the Monetary Authority to assess the extent of system-wide risks resulting from excessive credit growth and determine the corresponding level of the CCyB requirement, the Monetary Authority uses a methodology that synthesizes information from two main indicators, namely the size of the deviation of the credit/GDP ratio and the residential property price/rent ratios from their respective long-term trends, where the trends are estimated using data from the last two decades with a method (recommended by the Basel Committee and commonly used in macroeconomics to detect cyclical fluctuations) that gives a higher weight to more recent observations. A high credit/GDP gap signals significant leverage in the non-bank private sector (as the accumulated effect of above-trend credit growth over a period of time) and therefore vulnerability to such negative shocks as an increase in interest rates or a fall in income. A high residential property price/rent gap signals potentially unsustainably high property valuations (as a result of above-trend price increases over a period of time) and therefore vulnerability to a major market correction. However, the Monetary Authority also assesses a broader set of indicators and other relevant information before reaching a decision on the appropriate level of the CCyB.
Hong Kong Monetary Authority
27 January 2015