The Monetary Authority announced today, 14 January 2016, that the countercyclical capital buffer (CCyB) for Hong Kong will increase to 1.25% with effect from 1 January 2017, from the current 0.625%. This increase is consistent with the Basel III phase-in arrangements for the CCyB.
“A continued build-up of the CCyB is warranted in Hong Kong given that key indicators, such as the credit/GDP gap and the property price/rental gap, remain at elevated levels.” Mr Norman Chan, the Monetary Authority, said. “This remains the case even though the pace of credit growth has slowed recently and there are initial signs of easing in the property market. The risks associated with recent credit and property market conditions have however not abated and the CCyB provides an additional measure of resilience should those risks crystallize.”
Further details of the decision may be found in the Announcement of the CCyB to authorized institutions on the HKMA website.
In setting the 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 III regulatory capital framework) would signal a CCyB of 2.5% at the upper end of the Basel III range.
Whilst the indicative buffer guide, as its name suggests, provides a “guide” for CCyB decisions, the determination of a CCyB ratio 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 III 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 III will begin at 0.625% of banks’ risk-weighted assets on 1 January 2016 and increase each subsequent year by an additional 0.625% to reach its final maximum of 2.5% on 1 January 2019. This means that for 2017 the maximum CCyB under the Basel III phase-in arrangement is 1.25%. In line with the Monetary Authority’s general approach to the adoption of the Basel III framework, the Monetary Authority has on this occasion decided to follow the Basel III phase-in level.
The CCyB is an integral 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. This means that for 2017 the Capital Conservation Buffer rate will be 1.25%.
The power to implement the CCyB in Hong Kong is provided by the Banking (Capital) Rules, which enable the Monetary Authority to announce a CCyB rate for Hong Kong if the Monetary Authority considers that a period of excessive credit growth in Hong Kong is leading to a build-up of system-wide risks in the financial system of Hong Kong.
Hong Kong Monetary Authority
14 January 2016