ENG-2011 — Page 124

88 | Financial and Monetary Affairs

promote efficiency, integrity and development of the financial system, particularly the payment and settlement arrangements.

The HKMA is an integral part of the Government, but can employ staff on terms that differ from those of the civil service to attract personnel of the appropriate experience and expertise. Its staff and operating costs are charged directly to the Exchange Fund instead of the General Revenue. The HKMA is accountable to the Financial Secretary, who is advised by the Exchange Fund Advisory Committee (EFAC) on investment policies and strategies for the Exchange. Fund and on projects that are charged to the Exchange Fund, such as the development of financial infrastructure.

The Banking Advisory Committee and the Deposit-taking Companies Advisory Committee are established under the BO to give advice on relevant policy matters. They are chaired by the Financial Secretary and comprise members from the banking industry and other professions.

The HKMA seeks to maintain a regulatory framework that is fully in line with international standards. The aim is to devise a prudential supervisory system to help preserve the general stability and effective operation of the banking system, while at the same time providing sufficient flexibility for Als to make commercial decisions.

Recent Developments

The Hong Kong banking sector remained robust in 2011 despite a worsening of the European sovereign debt crisis. Bank lending continued to grow significantly, resulting in tightened liquidity conditions, but the liquidity ratio of banks remained well above the statutory minimum. Asset quality improved further and locally incorporated Als remained well capitalised.

The HKMA has been closely monitoring the credit growth of Als because of potential stress on credit quality and liquidity risk management. Early in the year, Als were required to submit their business plans and funding strategies to the HKMA for review. Where considered appropriate, the HKMA requested Als to revise their business plans having regard to the sustainability of stable funding to support their lending activities. To build a stronger buffer against possible deterioration in asset quality, the HKMA also discussed with the retail banks the raising of their regulatory reserves to individually agreed levels by the end of 2011. Industry consultation on the primary legislation for implementing the Basel III requirements in Hong Kong had also been conducted.

Having regard to the continued increase in risk of a property price bubble which might potentially undermine the stability of the banking system, the HKMA introduced on June 10, 2011 the fourth round of countercyclical macro-prudential measures since October 2009. These macro-prudential measures have strengthened the risk management standards and practices of Als in their mortgage lending business. This also enables Als to build up a larger safety cushion to absorb potential losses arising from a property market downturn.