Hong Kong Contingent Bank Capital Facility (CBCF)

The Contingent Bank Capital Facility shared a press release with the new expansion of deposit guarantees (FS 2008), and its establishment also followed several weeks of newly implemented HKMA liquidity measures (HKMA 2009b). The purpose of the CBCF was to provide standby capital to banks during the Global Financial Crisis. Moreover, the CBCF came in the middle of a spate of capital injection programs across other developed markets (COP 2009, 12).

The Exchange Fund Ordinance, originally of 1935, established an Exchange Fund to be under the discretion of the financial secretary in consultation with an Exchange Fund Advisory Committee. During the Global Financial Crisis, the ordinance’s outlined authorities provided the secretary the power to use the Fund’s resources to affect the exchange value of the Hong Kong currency and, secondarily, to engage in stabilizing transactions that aim to maintain “Hong Kong as an international financial centre” (HKMA 2008a; LegCo n.d.). In addition to the established funds, the Exchange Fund Ordinance also granted the secretary the legal authority to borrow for the Fund up to HKD 50 billion (approximately USD 6.5 billion) via sovereign debt issuance, without securing any additional authorization (LegCo n.d.).

Chief Executive of the HKMA Joseph Yam generally referred to the CBCF as a precautionary measure, enacted in response to adverse foreign developments (FS 2008; Yam 2008b, 12). Contemporary media coverage, however, noted that Hong Kong’s Bank of East Asia had started to experience a run in the weeks preceding the announcement of the CBCF (Wan 2008).

Yam consistently reiterated that the HKMA did not expect banks to use the CBCF, due to the perceived strength of the Hong Kong banking sector (FS 2008; HKMA 2008a, 4; Panel 2008, 11).

Given the limited outlines of the program itself as well as its lack of uptake, there does not seem to have been any material discussion of governance.

Had any banks utilized the CBCF, requesting banks would have been subject to additional monitoring by the HKMA. Borrowing institutions would have been subject to enhanced supervisory scrutiny with respect to material deviations in risk, balance sheet structure, or business strategy. The HKMA would have required borrowing institutions to notify it before beginning or materially expanding a line of business (HKMA 2008b).

The Exchange Fund was the source of funds for the CBCF. While policymakers did not offer an explicit monetary figure, the Fund contained approximately HKD 1.4 trillion (approximately USD 180 billion) in October 2008 (Wong and Tang 2008; HKMA 2008c). As noted in Key Design Decision No. 2 above, the financial secretary could also supplement the Fund’s resources with up to HKD 50 billion (about USD 6.5 billion) of sovereign borrowing. However, the financial secretary also committed the Fund’s resources to the expanded deposit guarantee scheme announced alongside the CBCF (FS 2008).

This list included 23 Hong Kong banks (HKMA 2009a, 197). Licensed banks were the only type of bank allowed to accept consumer deposits less than HKD 100,000 (approximately USD 13,000) (HKMA n.d.). Notably, the deposit guarantee scheme announced alongside the CBCF expanded deposit insurance to banks outside this “licensed” classification (FS 2008; HKDPB n.d.).

The only apparent limit on the amount of funding available to an institution seemed to be the available amount in the Exchange Fund.

HKMA would have designed the structure of CBCF investments with consideration for each requesting bank’s individual circumstances (HKMA 2008a, 3). Without a stated structure design or any ultimate usage of the program, it is not clear what kind of structure the HKMA injections would have assumed.

It appears any injections would have come with conditions that encouraged banks to replace the Exchange Fund’s investment with private capital (HKMA 2008b). HKMA Chief Executive Yam noted that banks would prefer private capital to the CBCF due to the enhanced restrictions and supervisory measures that would be attached to that latter (Yam 2008a).

Had the financial secretary made investments under the CBCF, it is not clear how long the Exchange Fund would have held onto any shares.

HKMA Chief Executive Yam stated that, alongside the CBCF, the HKMA would adopt a “flexible approach to adjusting the ‘premium’ over the statutory capital adequacy ratio” for individual banks, but it is not clear how this flexibility would have interacted with capital injections pursuant to the CBCF (Yam 2009, 8).