None of these mechanisms would breach the Currency Board rules, since the Hong Kong dollar liquidity thus created, in the form of the addition to the Aggregate Balance of the banking system, would be BIS Review 77/1999  4  matched either by a decline in another component of the monetary base (the Exchange Fund paper) or an increase in US dollar assets. Beyond this, we have stated on several occasions in the past that, in exceptional circumstances, where there is a risk that large-scale Hong Kong dollar transactions might create extreme conditions in the LQWHUEDQN PDUNHW DQG DIIHFW WKH VWDELOLW\ RI WKH H[FKDQJH UDWH  WR DQ H[WHQW XQZDUUDQWHG E\ DQ\ economic fundamentals - the HKMA may temporarily lend or borrow Hong Kong dollars to or from the interbank market to dampen these extreme conditions. Should an imminent bank failure pose the threat of triggering extreme conditions in the money and foreign exchange markets, there may be justifications for the HKMA to inject liquidity directly into the interbank market, on a temporary basis, to ensure systemic stability. This would represent a departure from the strict rules of the Currency Board system. The availability of excess foreign currency reserves allows some scope for discretion, but the intention would anyway be that this injection should be only temporary.
Preconditions for Lender of Last Resort Support The basic precondition for lender of last resort support is the systemic risk that would, in the judgement of the HKMA, arise from the failure of a troubled institution if it were deprived of liquidity assistance. This is the basic precondition, but not the only precondition. The institution in question would also need to satisfy a number of further conditions designed to demonstrate that lender of last resort support is genuinely being sought as a last resort, and that such support would not amount to throwing good money after bad. To be specific, the additional preconditions are: •  First, the institution would need to have a sufficient margin of solvency. As a measure of sufficiency, we would generally require the institution to demonstrate that it maintains a capital adequacy ratio of at least 6% after making adjustment for any additional provisions that might be necessary. •  Secondly, the liquidity support extended to the institution would need to be adequately collateralised. •  Thirdly, the institution should have sought other reasonably available sources of funding before seeking lender of last resort assistance. •  Fourthly, the shareholder controllers of the institution should have made all reasonable efforts to provide liquidity or capital support as a demonstration of their own commitment to the institution. •  Fifthly, there must be no prima facie evidence that the management is not fit and proper, or that the liquidity problem is due to fraud.