Exiting from the temporary measures introduced in last year's crisis requires careful planning and co-ordination.
When people in the financial markets talk about exit strategies, they often focus on when and how central banks will move from quantitative easing to a normal monetary policy stance. I wrote about this subject last week. But there are also other special measures adopted in the current global financial crisis that the authorities will need to exit from. These measures broadly fall into three categories: provision of liquidity support; provision of capital; and guarantees of the liabilities of financial institutions. While exiting from these temporary arrangements probably does not have as direct an impact on financial markets as the exit from quantitative easing, it is still essential to have well-planned exit strategies to avoid any undesirable effects on the financial system and the economy.
As readers may be aware, in dealing with the global financial crisis that broke out last September we have had to take measures in all these three areas. We introduced five temporary measures to provide liquidity to the market. But as our financial system remained robust, credit concerns among the banks eased and the interbank market quickly returned to normal. We were therefore able to exit smoothly from these measures at the end of March this year as scheduled. But we did use the opportunity to review our framework for providing liquidity to the banking system, including our lender-of-last-resort policy, incorporating some of the originally temporary arrangements into our standing arrangements.
On provision of capital, I am pleased that so far no banks in Hong Kong have needed to use the Contingent Bank Capital Facility that we introduced last October. This demonstrates how robust our banking system is. The worst financial crisis of the century has indeed made a small dent in the capital adequacy of banks, and we must reckon the possibility that a period of economic weakness following the global financial crisis may affect their asset quality or require larger write-offs. But with the non-performing loan ratio at around 1.5%, the banks should be able to cope with further deterioration in asset quality or any additional provisions that might be necessary. The current level of the ratio compares favourably with what we saw about a decade ago, when it exceeded 10% as a result of economic weakness following the Asian financial crisis. So I am hopeful that no bank will need to use the facility, which will expire at the end of 2010, and banks that do decide to strengthen their capital as a prudent response to continuing uncertainties will have little difficulty in doing so through the markets in the normal way. Barring any further shocks, we expect the exit from this temporary measure at the end of 2010 to be smooth.
Exiting from the 100% deposit guarantee is a little more delicate. There is no doubt this temporary measure has been effective in boosting the confidence of depositors in the banking system. In fact, I was surprised to see the apparent dip in depositors' confidence before the guarantee was introduced, given that the global financial crisis erupted thousands of miles away from Hong Kong and the key statistics of our banking system had continued to show a considerable degree of strength that could only be envied by many other parts of the world. Contingency planning by the HKMA over the years has served us well, enabling us to introduce the 100% deposit guarantee quickly. We are aware of the possibility that exiting from this temporary measure could affect depositors' confidence in the banking system, and we will be exceedingly careful with formulating and implementing an exit strategy. But I hope with the passage of the crisis the community appreciates just how robust our banking system is.
We have already started work on modifying the Deposit Protection Scheme and readers will be aware of the intention to introduce a bill early next year to amend the law. There is already a considerable degree of consensus on the proposed modifications, and I hope the legislative process will be smooth to allow time for a publicity programme next year to ensure the community is fully informed about the new arrangements well before the deposit guarantee lapses at the end of 2010.
There is also an international dimension, which is particularly important given the huge amount of liquidity in the global financial system constantly searching for a safe home and a decent rate of return. As readers may be aware, Singapore and Malaysia also introduced similar deposit guarantees last summer, also with a commitment to exit from them at the end of 2010. There is therefore a need for close co-ordination with these two jurisdictions. During the EMEAP governors' meeting that I hosted here in Hong Kong last month, the central bank governors of Singapore and Malaysia agreed to establish a tripartite working group to co-ordinate a strategy to make the exit at the end of 2010 as smooth as possible.
Joseph Yam
20 August 2009
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