Our Ref: CB/POL/5/10
28 February 1992
To: All authorised institutions in Hong Kong
Banking Ordinance (Cap. 155)
Pursuant to section 63(2) of the Banking Ordinance, I hereby require all
authorised institutions in Hong Kong form 1 March 1992 to submit to me the information
specified in the Hong Kong Government Form BC 1G.
Institutions are required to report their positions as at the close of business
for each quarter ending 31 March, 30 June, 30 September and 31 December, and submit
the returns to me not later than 14 days after the reporting date. The first return will report
on institutions’ positions as at 31 March 1992. As a concession, institutions will be
allowed up to one month to lodge the first return.
D T R Carse
Commissioner of Banking
SUPERVISION OF THE ADEQUACY OF
LIQUIDITY OF AUTHORISED INSTITUTIONS
1. The Office of the Commissioner of Banking regularly reviews and
discusses with individual AIs their policies and practices for maintaining adequate
liquidity. The objective is to ensure that individual AIs are following management
practices which limit liquidity risks to prudent levels and that policies are observed and
reviewed to take account of changing circumstances.
2. Under the Banking Ordinance, every AIs is required to maintain a liquidity
ratio of not less than 25% calculated in accordance with the provisions of the Fourth
Schedule. This helps to ensure that an AIs has a substantial stock of liquid assets to
enable it to meet its day-day liquidity needs.
3. An important part of our process of the supervision of the adequacy of
liquidity is the regular evaluation of the maturity profile and related aspects of an AI’s
assets and liabilities. The evaluation provides a basis for identifying an AI’s potential
exposures to liquidity (or funding) risk and for measuring its liquidity position.
4. Compilation of a maturity profile involves categorising assets and
liablilities into maturity bands. The net position in each maturity band shows the
mismatching of assets and liabilities for that time band. From this a maturity ladder can
be derived, showing a series of accumulating net mismatch positions in successive time
bands. The pattern of cumulative net mismatch positions shows the timing and the level
of a bank’s maximum exposure to liquidity risk. In assessing the maturity profile, we take
account of the AI’s stock of liquid assets, the nature and volatility of deposits, contingent
liabilities, loan commitments, existence of standby facilities and recent experience in
liability management. The overall assessment provides an insight into how an AI
manages its liquidity.
5. The Office has reviewed its existing statistical data, and has concluded that
it does not enable it to construct an adequately detailed picture of an AI’s liquidity
position. A new maturity profile return has been introduced which seeks to collect more
comprensive regular data on the maturity structure, and other related aspects of their
assets and liabilities. The new return will provide a basis for regular discussions with AIs
about their liquidity policies and management.
6. We look to each AI to develop well diversified and stable sources of
funding and to maintain a suitably matched maturity structure of assets and liabilities. It is
also important that an AI develops and maintains a stable core of deposits. Reflecting
Hong Kong’s role as a regional banking centre, there is a heavy use of the inter-bank
market as a source of funding, especially by foreign banks. AIs should recognise that the
reliability of this technique depends importantly on both an individual AI’s standing in
the inter-bank market, which could be affected should the AI encounter financial stress or
adverse comment, and general liquidity conditions. Further, we expect an AI to maintain
a comfortable stock of liquid assets. Such a stock will provide the AI with necessary vital
breathing space in the event of problems with liquidity. Moreover, the visibility, quality
and size of the tranche of liquid assets is of importance in offering reassurance to
depositors and other creditors, thereby engendering confidence in the AI. On this, the
25% liquidity ratio requirement under the Banking Ordinance provides an important
7. Under existing arrangements, AIs should not assume that the authorities
would be willing to make funds available to individual AIs to enable them to meet day-to-
day pressures on their liquidity. In the conduct of monetary management, the authorities
will seek to ensure that there are sufficient funds available in the Hong Kong dollar
interbank market; it is then up to individual AIs to operate in the market and to manage
their own liquidity prudently and cost-effectively.
8. The new maturity profile return is set out in the Attachment. The return is
to be submitted by all AIs in Hong Kong, including branches of overseas banks. The
application of the return to branches of overseas banks gives recognition to the fact that
the liquidity position of a branch, particularly in relation to HKD business, is influenced
by local market conditions. The Office will discuss individually with locally incorporated
AIs whcih have overseas branches and subsidiaries the information required of their
oversaea operations to facilitate an assessment of their global liquidity.
Office of the Commissioner of Banking