This has not been helped by erroneous suggestions in some prominent newspapers that the replacement of the Liquidity Adjustment Facility with a Discount Window, as one of the seven technical measures introduced last September, has effectively ended the HKMA’s role as lender of last resort. The issue has been further clouded by the equally erroneous academic argument that the role as lender of last resort should not be mixed with the HKMA’s role as operator of a Currency Board system. The Consultants offer a number of other reasons why there should continue to be such uncertainty: the strongest, perhaps, is the fact that, since our establishment in 1993, the HKMA has never had to exercise its function as lender of last resort. I think we would all hope that this will long continue to be the case. And so, in the absence of an actual demonstration of the lender of last resort policy in action, we have to continue to rely on explanations of the principles behind the policy. With this in mind, I shall shortly be sending copies of a detailed policy statement on the HKMA’s role as lender of last resort to the chief executives of all authorised institutions in Hong Kong, and we shall be giving extensive publicity to the policy statement. I shall give here both a summary of, and an elaboration on, that policy statement.
Thirdly, notwithstanding the availability of suitable collateral, there will be a maximum limit on the amount of support provided to an individual institution through repos or the credit facility. This limit would normally be set at between 100% and 200% of the capital base of the institution concerned subject to a cap of $ billion. Exceptions We believe that the provision of these details will go a long way towards removing market uncertainty and improving market liquidity, especially in times of crisis. This is the first time that we have made clear our requirements and parameters in setting out the mechanics for lender of last resort support. The emphasis, both in these details and in the preconditions for support, is on a rule-based approach more than on discretion or constructive ambiguity, and this is consistent with the HKMA’s policy of transparency. It is, however, necessary to stress that the policy still requires the exercise of discretion by the HKMA DWYDULRXVVWDJHV LQ MXGJLQJ ZKHWKHU D V\VWHPLF ULVN H[LVWV IRU H[DPSOH LQ GHFLGLQJ ZKHWKHU DQ institution meets the preconditions for support, and in determining the methods and level of support. Furthermore, any policy that is essentially a contingency plan for dealing with unusual, unanticipated, and undesirable situations must necessarily contain a provision for circumstances that fall outside the framework outlined in the policy. Such a situation might arise where, for example, an institution is unable to comply with the preconditions for lender of last resort support that I have outlined.