This dissertation, "Managing Financial Stability and Liquidity Risks in Hong Kong''s Banking System: What is the Optimum Supervisory Model?" by Evan Corby, Gibson, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: The 2007-8 global financial crisis brought to the fore a new era of liquidity risk. Governments around the globe were forced to intervene to preclude a complete collapse of their respective financial and banking systems. The failure of financial supervision was in part caused by segments of the financial system being either inadequately regulated or unregulated. Thus far the international response - including in Hong Kong - has focused on regulatory tools. However, does this approach reflect the prudent management of liquidity risks which threaten financial stability? This thesis will analyse the optimum supervisory model to manage the financial stability of Hong Kong''s banking system when exposed to substantial liquidity risks. The key elements necessary - financial stability, liquidity, and financial supervision of the banking and monetary systems - will be analysed to form a theoretical basis to determine the optimum supervisory model. Supervisory and regulatory issues influencing the relationship between financial supervision and the regulatory toolkit shall be examined in detail under three broad themes, the unified sectoral supervisory structure, integrated and cross-sectoral supervision, and systemic supervision. Unified sectoral supervision will concentrate on the issue of central banking and whether this should be unified or separated from banking supervision when managing market liquidity. The analysis reveals that the HKMA''s constrained monetary policy powers impairs the capacity to manage financial stability. Further market liquidity tools can be successfully implemented by a central bank without a banking supervisory ambit. A unified structure was beneficial to mitigate co-ordination frictions between supervisors. There was no perceived advantage between the Integrated and Sectoral supervisory models when planning the implementation of market liquidity facilities. However the HKMA''s cross-sectoral supervisory ambit is subject to structural biases with the supervision of hybrid financial instruments suffering from micro-prudential underlap. This flaw can adversely affect the supervision of universal banks'' liquidity ratios. The HKMA is susceptible to a market conduct bias similar to the United Kingdom''s Integrated model. The HKMA does not capture systemic liquidity risks outside the banking system. Systemic macro-prudential supervisory underlap and frictions arise between the HKMA and the Financial Stability Council. The HKMA''s supervision of banks'' short-term liquidity ratios is impeded by systemic cross-sectoral micro-prudential underlap. Supervision of OTC derivative financial infrastructure is constrained by the SFC''s and HKMA''s systemic macro-prudential supervisory underlap. This underlap encapsulates all financial sectors outside the HKMA''s supervisory ambit, notably the shadow banking system. Renminbi infrastructure is subject to a systemic macro-prudential underlap between the HKMA and the People''s Bank of China. Micro-prudential Renminbi banking supervision is inhibited by a supervisory underlap between the HKMA and the China Banking Regulatory Commission. Despite the HKMA''s supervisory structure reflecting Hong Kong''s banking and monetary systems, the design is structurally flawed when exposed to substantial liquidity risks which threaten financial stability in the banking system. On balance, the o

"Throughout Hong Kong's history, financial markets and their regulation have evolved with financial crises. Every significant financial crisis in Hong Kong has pivoted on liquidity in either or both the banking and monetary systems. Accordingly, liquidity support has played a prominent and critical role in managing Hong Kong's financial stability. From the beginning, the lender of last resort was the primary means of managing banks' liquidity and solvency, with funding being sourced from the private sector. Although the government has assumed this role over the past 30 years, there is yet to be a need for this support. With the modernization of financial markets, banks have become susceptible to funding and market liquidity. These liquidity risks were exemplified in the 2008-9 global financial crisis (GFC) and resurfaced, to a lesser extent, at the beginning of the Covid-19 pandemic"--

This Technical Note on Crisis Management and Bank Resolution Framework was prepared in the context of the Financial Sector Assessment Program for the People’s Republic of China–Hong Kong Special Administrative Region (HKSAR). Overall, the existing institutional framework facilitates communication and coordination domestically, as well as on a cross-border basis. Information sharing and coordination among domestic regulatory authorities and with the Government is undertaken through a variety of formal mechanisms, which are supported by sound legal bases for the exchange of confidential information. There are complementary structures in place for macro- and micro-prudential supervision that contribute to the prevention and identification of problems in banks. Market-wide or bank intrinsic risk issues will be identified by macroprudential surveillance and bank supervision in the Hong Kong Monetary Authority, or by other financial sector regulatory bodies. The deposit protection scheme is transparent, and trusted; however, steps should be taken to enhance efficiency of pay-outs and to ensure the scheme’s sustainability.

This book discusses the risks and opportunities that arise in Emerging Asia given the context of a new environment in global liquidity and capital flows. It elaborates on the need to ensure financial and overall economic stability in the region through improved financial regulation and other policy measures to minimize the emergent risks. "Managing Elevated Risk: Global Liquidity, Capital Flows, and Macroprudential Policy—An Asian Perspective" also explores the range of policy options that may be deployed to address the impact of global liquidity on domestic financial and socio-economic conditions including income inequality. The book is primarily aimed at policy makers, financial market regulators and supervisory agencies to help them improve national regulatory systems and to promote harmonization of national regulations and practices in line with global standards. Scholars and researchers will also gain important information and knowledge about the overall impacts of changing global liquidity from the book.

This Financial System Stability Assessment report on Hong Kong Special Administrative Region (HKSAR) highlights that HKSAR’s financial sector is very well regulated, with the capacity to withstand a diversity of shocks. The sector, however, faces major risks, which puts a significant premium on effective liquidity management, macroprudential oversight, and microprudential supervision. The regulation and supervision framework of the financial sector is of a high caliber, and displays a high level of compliance with international standards, but there remains scope for further strengthening. Financial market infrastructures are highly sophisticated, but further enhancements are needed to fully comply with new international standards.

Hong Kong SAR has significantly strengthened its crisis management arrangements through a thorough update of the framework for resolution of financial institutions, as recommended by the 2014 Financial Sector Assessment Program. The 2017 Financial Institutions (Resolution) Ordinance (FIRO) creates a resolution regime that is clear, comprehensive in scope, and closely aligned with the Financial Stability Board (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions. Some aspects of the FIRO, such as the cross-sectoral scope of the regime, are particularly strong. To implement the regime, the Hong Kong Monetary Authority (HKMA) 2 has established a Resolution Office (RO) with clear operational separation from banking supervision.