TNAG-2471-FCO40-3595-Confidential-talks-between-the-UK-and-China-regarding-financ-1992 — Page 44

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