TNAG-1487-FCO40-2044-Hong-Kong-banking-Banking-Bill-1986-1986 — Page 265

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Liquidity ratio

The sixth area relates to liquidity. The Bill introduces new

liquidity requirements to replace the present ones. These will put

authorized institutions in a better position to meet liabilities such as

customers and interbank deposits as they fall due.

There is a whole range of approaches to defining the liquidity

ratic. What is proposed is an improvement and at the same time a

simplification. In effect, it requires authorized institutions to maintain

"liquefiable assets" for all "qualifying liabilities", that is, liabilities

maturing or callable within one month, at a ratio of not less than 25%. The

definitions relating to "liquefiable assets", a term which takes into

account cash inflows expected to arise from the maturing of non-liquid

assets, and to "qualifying liabilities", are contained in the Fourth Schedule.

The sanctions in support of this requirement parallel those in the case of

the capital to risk assets ratio.

Let me emphasize that liquidity is not something that can be

regulated entirely through a technical ratio. The Bill supplements the

liquidity ratio by requiring institutions to seek the Commissioner's

approval before giving charges over more than 5% of its local assets. They

are also required to report to the Commissioner any civil proceedings

against them that could adversely affect their financial position. In

addition, in examining an institution's position, the Commissioner would

be concerned not only with its compliance with the ratio as defined, but

also with its overall liquidity profile. He may impose additional liquidity

requirements on any institution as necessary.

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