Cross Border Issues IMF Conference on Operationalizing Systemic Risk Monitoring Washington, D. C. 26 May 21 Hong Kong s Experience Dong He Executive Director (Research) Hong Kong Monetary Authority 1
Outline 1) Characteristics of cross-border banking in Hong Kong 2) Challenges in assessing systemic risks in cross-border banking 2
Heavy presence of world's largest banks in Hong Kong Number of overseas banks 2 Top 5 Top 51 to 1 Top 11 to 5 Number of authorized institutions 14 15 1 5 46 44 43 43 42 44 43 42 43 42 2 21 22 23 24 25 26 27 28 29 5 12 1 8 6 4 2 Branches Subsidiaries Branches Subsidiaries Branches Subsidiaries Licensed banks Restricted licensed banks Deposit taking companies Note: Figures at the end of 29 Top 5 Top 51-1 Top 11 to 5 3
Large cross-border banking flows % of assets 4 35 3 25 2 15 1 5 Lending to and borrowing from banks abroad 2 21 22 23 24 25 26 27 28 29 HKD lending Foreign-currency lending HKD borrowing Foreign-currency borrowing 4
A major fund supplier US$ Bn Germany 6 526 Switzerland 4 386 Cayman Islands 371 Hong Kong 299 2 Net external claims and liabilities vis-à-vis banks Belgium 161 Japan 146 Bahamas 13 (+) represents net claims Jersey 128 Luxembourg 96 Singapore 61-2 -4-6 -8 France -546 Italy -38 Spain -366 Ireland -312 Netherlands -289 Australia -277 Sweden -171 Denmark -166 (-) represents net liabilities South Korea -142-1, UK -894 Note: Net external positions of banks in individual reporting economies. Source: BIS locational banking statistics, Sep-29 positions. 5
External claims/ liabilities vis-à-vis major economies External claims External liabilities 1% 17% 1% 51% 8% 46% 13% 12% 11% 9% China Singapore Japan UK USA Others 7% 6% China Singapore Japan UK USA Others Note: Figures are at the end February 21. 6
Different Business models (I) Customer deposits to fund overseas bank offices % of total liabilities 1 % of total assets 1 8 8 6 4 75 69 83 81 6 4 76 71 87 77 2 2 Before crisis After crisis Before crisis After crisis Before crisis After crisis Before crisis After crisis Bank 1 Bank 2 Other liabilities Amount due to overseas offices Deposits from customers Deposits and balances from unconnected banks Bank 1 Bank 2 Other assets Amount due from overseas offices Investment securities Loans and receivables Notes: Before crisis: Dec-27 After crisis: Jun-29 7
Different Business models (II) Liquidity management centre for banking group % of total liabilities 1 % of total assets 1 8 8 6 4 49 58 76 69 6 4 86 84 89 75 2 2 Before crisis After crisis Before crisis After crisis Before crisis After crisis Before crisis After crisis Bank 1 Bank 2 Bank 1 Bank 2 Other liabilities Amount due to overseas offices Deposits from customers Deposits and balances from unconnected banks Other assets Amount due from overseas offices Investment securities Loans and receivables Notes: Before crisis: Dec-27 After crisis: Jun-29 8
% of total liabilities 1 Different Business models (III) Overseas bank offices funding to support local non-bank lending % of total assets 1 8 8 6 51 62 9 82 6 4 2 4 2 35 63 5 64 Before crisis After crisis Before crisis After crisis Bank 1 Bank 2 Other liabilities Amount due to overseas offices Deposits from customers Deposits and balances from unconnected banks Notes: Before crisis : Dec-27 for Bank 1 After crisis : Jun-29 Jun-28 for Bank 2 Before crisis After crisis Before crisis After crisis Bank 1 Bank 2 Other assets Amount due from overseas offices Investment securities Loans and receivables 9
Where do systemic risks arise? High degree of interconnectivity may imply large spillovers When a crisis erupts elsewhere Banks relying on funding support from overseas may face a sudden dry up of liquidity Banks supplying funding to overseas may suffer credit losses and possibly liquidity squeeze Dislocation of money and foreign exchange markets 1
6, 5, 4, 3, 2, 1, Evidence during the 27-9 9 crisis (I) HKD billion 26 27 28 29 21 Claims on banks Liabilities to banks Claims on non-bank customers Liabilities to non-bank customers 11
Evidence during the 27-9 9 crisis (II) The interbank market 6 5 % Overnight HIBOR quoted by local and overseas banks Spread between overseas banks and local banks Overseas banks Decomposition of 3-month Hong Kong dollar HIBOR OIS spreads Liquidity factor Credit factor Basis points 28 24 2 4 Local banks HIBOR - OIS spread 16 3 12 2 8 1 4 27 28 29 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 12
Evidence during the 27-9 9 crisis (III) The forex swap market Interest rate (% p.a.) 7 6 5 4 3 9 Aug 7 Onset of crisis 14 Mar 8 Bear Stearns acquired 15 Sep 8 Lehman failure Three-month FX swap-implied USD rate CIP deviation (in bps) 8 Deviation from CIP (rhs) 4-4 2 Three-month USD LIBOR -8 1 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9-12 13
Challenges in assessing systemic risks in cross-border banking 1. A better understanding of different business models of global banking Tradeoffs between efficiency and stability The use of funding hubs and the role of international financial centres 2. A better understanding of interconnectivity of cross-border funding markets Shock transmission channels 3. More information on maturity/currencies mismatches, and off-balance sheet positions Mechanisms for more effective information sharing 14
- End of presentation - Many thanks for your attention