We were concerned that the low mortgage rates banks charge might not be adequate to cover the potential credit loss if property prices were to correct sharply in the future. The HKMA has therefore spent quite some time in ensuring that the mortgage pricing of banks is sustainable in the medium to long term. 8. Cultural issues: The paper points out that the introduction of the 70% LTV guideline in 1991 was a joint-initiative by the public and private sectors where both saw the need for a more prudent LTV standard to ensure the sustainability of banks’ mortgage business. The market has moved on since then. With banks increasingly focus on short-term profit maximization, we have seen many instances where banks attempted to circumvent our macroprudential policies. 9. Some banks used their group entities outside Hong Kong to extend mortgage facilities exceeding the HKMA’s limits to buyers of Hong Kong properties. The banks thought that they could bypass the HKMA’s macroprudential measures through these “creative” cross-border arrangements. They were wrong. In all these cases, we made it clear to the banks that their activities are tantamount to regulatory arbitrage, which is unacceptable and which reveals a more fundamental problem about their corporate culture. If the senior management themselves do not comply with the regulatory requirements applicable to their institution, how can they expect their staff to observe the requirements of the bank? The HKMA shared our concerns with the relevant home supervisors and obtained their assistance to follow up the issue at the group level.
Many jurisdictions have implemented macroprudential measures similar to those in Hong Kong, including loan-to-value ratio (LTV) caps and stress testing on the mortgagor’s ability to cope with interest rate rises in terms of their repayment ability. Challenges and mitigation: calibration of macroprudential policies 4. I would like to take this opportunity to share our experience gained since the GFC in operating our macroprudential measures on mortgage lending. My remarks would focus on what I call the “4Cs”. 5. Calibration: Driven by the low interest rate environment and limited housing supply, residential property prices in Hong Kong continue to grow since the GFC. This has posed increasing risks to financial stability in Hong Kong. In response, the HKMA implemented 8 rounds of tightening of the macroprudential measures from 2009 to 2017. Unlike monetary policies, there has been far limited literature on how macroprudential measures should be calibrated with respect to changes in asset price levels. The complex dynamics underlying the property market in Hong Kong has made it very difficult, if at all possible, to develop an ex ante framework governing how the HKMA should operate its macroprudential policies. So, what we have done is to tread extremely carefully in each round of adjustment. The HKMA has established a cross-departmental committee to regularly review whether the prevailing macroprudential measures would need to be adjusted, taking into account a host of factors including the property price trend, transaction volumes, domestic economic fundamentals and the external environment.