LCQ1: Incidents of a number of banks in the United States being taken over

During a recent session of the Legislative Council, Mr. Christopher Hui, Secretary for Financial Services and the Treasury, was asked a number of questions in connection with the recent bank failures in the United States. Specifically, the Secretary was requested to provide information on
(1) the exposures of authorized institutions in Hong Kong to the Silicon Valley Bank (SVB);
(2) potential risks to the local financial market, if the situation deteriorates and more banks become insolvent;
(3) measures the government has taken to prevent a snow-ball effect in Hong Kong;
(4) whether or not Hong Kong issuers will have to disclose their exposures to SVB;
(5) whether or not the government knows of further plans of the U.S. Federal Reserve Board (FED) to raise interest rates again; and
(6) the measures the government plans to take to prevent further losses of banks with large bond portfolios due to the subsequent decline in asset prices.
In brief, the Secretary noted the following:
– As far as exposures are concerned, the government notes that neither banks, nor issuers and other financial market participants have considerable exposures to the SVB. The Hong Kong financial market regulators had taken swift action to check upon this matter. Additionally, the Hong Kong banking sector is highly resilient „with strong capital and liquidity positions“. The risks resulting from the failure and even from subsequent failures of smaller banks should be manageable, so the Secretary. Nevertheless, the government will closely monitor the situation and take decisive action, if so needed.
– As far as bank losses are concerned due to declining asset prices as a result of yield hikes, Mr. Hui notes that most Hong Kong banks are invested in relatively short-term fixed income securities (up to three years). The recent increase in interest rates does not affect these short-term securities as much as they do long-term bonds, leaving the overall effect on operating income of financial institutions neglectable. In fact, the difference in the book value of fixed income securities to market values of same instruments only amounted to about 2% in the banking books by year end 2022. Additionally, banks in Hong Kong are well diversified and subject to stringent stress tests that also simulate such hikes to ensure an adequate capital and liquidity position of banks. Hence, the government – at this point in times – sees no reason to believe that the current risk situation couldn’t be manageable by institutions.