Introduction
FIDENTIAL
LIQUIDITY ADJUSTMENT FACILITY
3
There is considerable confusion amongst licensed banks concerning what exactly is the role that Government is playing or is prepared to play as lender
of last resort.
is a need for clarification.
2.
There
and
of late
There is also concern amongst licensed banks that the money markets for the Hong Kong dollar,
the
the existing arrangements for
provision liquidity assistance by the Exchange Fund, do not provide banks with adequate means of adjusting positions. There is a need to address this concern.
3.
their
funding
In view of these, the Office of the Exchange
reviewed present arrangements.
existing
This
paper
Fund has clarifies lender of last resort policy and proposes
formalizing
for arrangements
the provision of late liquidity assistance through the of a Liquidity Adjustment Facility (LAF).
Lender of last resort policy
4.
In discussing Government
resort,
it
is
policy
necessary
introduction
concerning
first
to
lender of last distinguish between the situation when a bank requiring
liquidity support
is
its solvency,
and
the
experiencing problems
situation when
affecting
it is
not.
It
is of course possible that serious liquidity problems experienced by a solvent bank may in the end threaten its solvency, under normal circumstances the distinction can clearly and safely be made.
CONFIDENTIAL
P.3