Applicable Jurisdictional Countercyclical Capital Buffer Ratio for Hong Kong

Our Ref: B1/15C, B9/128C
18 October 2024
The Chief Executive
All Authorized Institutions
Dear Sir / Madam,
Applicable Jurisdictional Countercyclical Capital Buffer (CCyB) Ratio for Hong Kong The purpose of this letter is to notify your institution in accordance with section 3Q(10) of the Banking (Capital) Rules (BCR) that I have today announced pursuant to section 3Q(3) of the BCR, the CCyB ratio for Hong Kong is reduced from 1% to 0.5% with immediate effect. I enclose for your reference a copy of the formal announcement of the CCyB ratio for Hong Kong which will be posted on the HKMA’s website today. If your institution has any questions regarding the CCyB ratio for Hong Kong, please contact Mr Jule Chong at jckchong@hkma.gov.hk. Yours faithfully, Eddie Yue Monetary Authority Encl.

1
Announcement by the Monetary Authority on
Applicable Jurisdictional Countercyclical Capital Buffer Ratio for Hong Kong 18 October 2024 The Monetary Authority hereby announces, pursuant to section 3Q(3) of the Banking (Capital) Rules (Cap. 155L) (BCR), that the applicable jurisdictional countercyclical capital buffer (CCyB) ratio for Hong Kong is reduced from 1% to 0.5% with immediate effect. The considerations underlying this decision are set out in the Annex to this announcement. Monetary Authority 18 October 2024

2
Annex
Decision
In reaching his decision to reduce the Hong Kong jurisdictional CCyB ratio from 1% to 0.5%, the Monetary Authority has reviewed a range of quantitative indicators and qualitative information. This included the “indicative buffer guide” produced by the Monetary Authority’s Initial Reference Calculator (IRC) which is a metric that takes into account conditions in local credit and property markets. By mapping deviations (“gaps”) of the ratios of (i) credit to GDP; and (ii) residential property prices to rentals; from their respective long term trends to the Basel III CCyB range of 0% to 2.5%, the IRC produces a consistent starting point for further analysis. A gap has to be greater than 2% to be regarded as significant for the purposes of the IRC, and has to reach 10% to signal a 2.5% CCyB. The latest IRC, calculated based on 2024Q2 data and the Positive Neutral CCyB according to the revised formula, signals a CCyB of 1%. The projection based on all available data suggests that the IRC would likely signal a CCyB of 1% when all relevant 2024Q3 data become available. The setting of the CCyB for Hong Kong is however not a mechanical exercise and the Monetary Authority always considers a broad range of information in addition to the indicative buffer guide produced by the IRC. In particular, the Monetary Authority also reviewed a series of “Comprehensive Reference Indicators” and all relevant information available at the time of decision. While the local economy has continued to recover, the risk of economic overheating is well contained as suggested by the quantitative indicators. Facing changes in the market landscape, certain sectors in the domestic economy, in particular the SMEs, are nevertheless still seeing challenges in their business operations amid uncertainties in the external and local economic environment. It is therefore appropriate to reduce the CCyB moderately to allow banks to be more supportive to Hong Kong’s economy. Together with the other measures already introduced by the HKMA to support SMEs, a lower CCyB at this juncture will provide banks with additional leeway to further facilitate the financing needs of local SMEs. The Monetary Authority will continue to monitor the situation closely and the CCyB ratio will be reviewed on a quarterly basis or more frequently.

3
Background
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 against systemic risks. 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 power to implement the CCyB in Hong Kong is provided by the Banking (Capital) Rules, which give the Monetary Authority the power to announce the CCyB ratio applicable to Hong Kong. The specific CCyB requirement applicable to a given Authorized Institution (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 applicable in each jurisdiction where it has such exposures. As an initial reference for the Monetary Authority to assess the extent of system-wide risks and determine the corresponding level of the CCyB requirement, the Monetary Authority uses a methodology that synthesises information from two main indicators, namely the size of the deviation of the credit/GDP ratio and the residential property price/rent ratio from their respective long-term trends, where the trends are estimated using historical data 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 negative shocks such 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 considers the Positive Neutral CCyB and assesses a broader set of indicators and other relevant information before reaching a decision on the appropriate level of the CCyB.