I Briefing on the work of Hong Kong Monetary Authority
Deposit Protection Scheme
Members pointed out that currently under the Deposit Protection Scheme (“DPS”), each depositor’s aggregate deposits in a scheme member were protected up to a limit of HK$500,000 (“protection limit”), but such limits in the United Kingdom and the European Union were currently set at a level of about HK$910,000. In view of the increased cash holdings by members of the public due to the volatile investment environment, members enquired whether HKMA had plans to raise the protection limit.
HKMA responded that the international standard for deposit protection was based on the ratio of customers that could be covered by the protection limit. While such ratio stretched across a wide range, 90% coverage of deposits was generally adopted as a reference standard. Taking the protection limit of HK$500,000 in Hong Kong as an example, it could currently give protection to about 88% to 89% of bank customers’ deposits. To ensure that DPS was effective in serving its policy objective of protecting depositors, the Hong Kong Deposit Protection Board had commissioned a comprehensive review on DPS, with the target of putting forth the review proposal in the first half of 2023.
Financial stability, interest rate movements and the property market
Members noted that as at the end of 2022, the household net worth-to-liabilities ratio in Hong Kong was as high as 11 times, while the number of residential mortgage loans in negative equity had even increased from 55 in the second quarter of 2022 to 533 in the third quarter of the same year. Members asked whether HKMA would consider setting indicators to review afresh and adjust its countercyclical macroprudential measures on mortgage loans (“countercyclical measures”) when the number of residential mortgage loans in negative equity rose to a certain level.
HKMA advised that the number of negative equity cases had recently increased following an adjustment in property prices. Nevertheless, as HKMA had been implementing over the yearsthe macroprudential measures, under which residential mortgages were subject to very stringent regulatory requirements, including debt servicing ability and stress test requirements, the impact on borrowers’ debt servicing ability was still manageable even if interest rates rose. HKMA would closely monitor the market development and review its countercyclical measures in light of the circumstances.
Management of the Exchange Fund
Noting that while the majority of mixed-asset funds in the market, irrespective of their investment strategies, had suffered significant losses of more than 20% in the first three quarters of 2022, the Exchange Fund (“EF”) had only registered loss of around 6% of its assets over the same period, members enquired about the investment strategies and defensive measures adopted by HKMA in managing EF, including the Long-Term Growth Portfolio (“LTGP”), bonds and other equities under EF.
HKMA advised that in the face of uncertainties of the external environment, HKMA had been managing EF flexibly in response to volatility and changes in global market conditions, including diversifying its investments to strive for higher returns in the long run and taking defensive measures as appropriate. Specifically, the increased share of cash and short-term papers/bonds in EF, coupled with the stable performance of Renminbi bonds, had enabled EF to maintain sufficient liquidity and increase its interest income while reducing the impact of market volatility on its overall investment income. In addition, the better investment performance of LTGP compared to the open market had also allowed EF to diversify its risk more effectively. HKMA added that as the asset allocation of EF was long-term in nature, it would not be adjusted significantly in response to short-term market volatility. However, defensive measures would be taken by reducing its holdings of high-risk assets (including equities) as appropriate to enhance its resilience against market fluctuations.