TNAG-2471-FCO40-3595-Confidential-talks-between-the-UK-and-China-regarding-financ-1992 — Page 75

CONFIDENTIAL.

LIQUIDITY ADJUSTMENT FACILITY

Introduction

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. There is a need for clarification.

2.

There is also concern

concern amongst licensed banks that the money markets for the Hong Kong dollar, and

the existing arrangements. for the provision of late- liquidity assistance by the Exchange Fund, do not provide banks with adequate means of adjusting their funding- positions. There is a need to address this concern.

3.

Fund has

In view of these, the Office of the Exchange reviewed present arrangements. This paper clarifies Lender of last resort policy and proposes formalizing existing arrangements · for the provision of late liquidity assistance through the introduction of a Liquidity Adjustment Facility (LAF).

Lender of last resort policy

4.

In discussing Government

to.

policy concerning

lender of: last resort, it is: necessary first distinguish between the situation when a bank requiring liquidity support is experiencing problems affecting

its solvency, and the situation when 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

PEL

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