Tom Fong

Loan-to-Value Ratio as a Macro-Prudential Tool - Hong Kong's Experience and Cross-Country Evidence

This study assesses the effectiveness and drawbacks of maximum loan-to-value (LTV) ratios as a macroprudential tool based on Hong Kongi¦s experience and econometric analyses of panel data from 13 economies. The tool is found to be effective in reducing systemic risk stemming from the boom-and-bust cycle of property markets. Although the tool could impose higher liquidity constraints on homebuyers, empirical evidence shows that mortgage insurance programmes (MIPs) that protect lenders from credit losses on the portion of loans over maximum LTV thresholds can mitigate this drawback without undermining the effectiveness of the tool. This finding indicates the important role of MIPs in enhancing the net benefits of LTV policy. Our estimations also show that the dampening effect of LTV policy on household leverage is more apparent than its effect on property market activities, suggesting that the policy effect may mainly manifest in impacts on household sector leverage.

Determinants of the Capital Level of Banks in Hong Kong

Banks incorporated in Hong Kong generally maintain a capital adequacy ratio (CAR) well above the regulatory requirement.1 For example, the average CAR of licensed banks was 28.3 per cent in the second quarter of 2004, against an average required minimum of just 10.3 per cent.2 This phenomenon is also common in other economies.3 It raises the question of what factors determine the actual amount of capital held by banks and, specifically, whether changes in regulatory requirements can affect the level of bank capital.4

Share Price Disparity in Chinese Stock Markets

The presence of price disparity between A- and H- shares suggests that the two markets are segmented and thus allocation of capital is inefficient. In this paper, we attempt to identify the factors contributing to the price disparity, with a view to helping policymakers find solutions to the problem. Our results suggest that the disparity is caused by a combination of micro and macro factors. The fact that some of these factors are found to have played a crucial role in determining the disparity implies that reforms that can remove or reduce the segmentation can potentially bring considerable benefits by improving price discovery and market efficiency.

Residential Mortgage Default Risk in Hong Kong

The sharp fall in property prices following the Asian financial crisis has led many residential mortgage holders in Hong Kong to experience negative equity. At the end of September 2004, there were about 25,400 loans with a market value lower than the outstanding loan amount. The total value of these loans was HK

Price Cointegration between Sovereign CDS and Currency Option Markets in the Financial Crises of 2007-2013

43 billion. The mortgage delinquency ratio reached a peak of 1.43 per cent in April 2001. While it has improved since the second half of 2001, the delinquency rate in September 2004, at 0.47 per cent, is still higher than 0.29 per cent in June 1998 when data were first collected.1 Given that residential mortgage lending represents a significant component of bank assets, how borrowers’ decisions to default are affected by the negative equity position of their mortgages is of interest to policy makers.2

An Assessment of the Long-Term Economic Impact of the New Regulatory Reform on Hong Kong

While the US dollar and Japanese yen are considered as safe-haven currencies, both their sovereign credit default swap (CDS) spreads and exchange rate have varied in a wide range since late 2007. This raises the question of interconnectivity between the anticipated sovereign credit risk and the market expectation of the dollar-yen exchange rate. This paper shows evidence of information flow from the sovereign CDS market to the dollar-yen currency option market during the sovereign debt crisis from September 2009 to August 2011 when concerns about sovereign credit risks in the developed economies were triggered. The impact of the US sovereign credit risk on the risk reversal is a separable risk factor in driving the market expectation of the dollar-yen exchange rate after controlling other macro-financial variables. While the Japanese sovereign CDS spread was higher than its US counterpart, its impact on the risk reversal was not significant.

Stress Testing Banks' Credit Risk Using Mixture Vector Autoregressive Models

This note provides a cost-benefit analysis of the proposed regulatory reform by the Basel Committee on Banking Supervision (BCBS) for Hong Kong. Following largely the methodology of a cross-country analysis by the BCBS, the long-term benefit from the reform is assumed to be derived mainly from a lower probability of a banking crisis, while the cost is mainly reflected in a lower level of GDP because of a higher lending rate charged by banks to compensate for the cost of compliance with the new regulatory standards. Our assessment results suggest that the regulatory reform would bring a net positive long-term effect for the Hong Kong economy, largely consistent with the overall assessment for selected economies by the BCBS. However, the net benefit for Hong Kong is estimated to range from 2.11% to 2.76% (in terms of real GDP) compared with the average estimates of 4.30% to 5.85% by the BCBS, assuming that banking crises cause a permanent GDP loss. The mild impact for Hong Kong probably reflects that, with the already strong capitalisation of the Hong Kong banking sector, the marginal benefit of higher capital may be relatively mild.

Gauging the Safehavenness of Currencies

This paper estimates macroeconomic credit risk of banksi¦ loan portfolio based on a class of mixture vector autoregressive models. Such class of models can differentiate distributions of default rates and macroeconomic conditions for different market situations and can capture their dynamics evolving over time, including the feedback effect from an increase in fragility back to the macroeconomy. These extensions can facilitate the evaluation of credit risks of loan portfolio based on different credit loss distributions.

Is the Hong Kong Dollar Exchange Rate 'Bounded' in the Convertibility Zone?

This study assesses the ‘safehavenness’ of a number of currencies with a view to providing a better understanding of how capital flows tend to react to sharp increases in global risk aversion during periods of financial crisis. It focuses on how currencies are perceived by dollar-based international investors or, more specifically, whether they are seen as safe-haven or risky currencies. To assess the ‘safehavenness’ of a currency, we use a measure of risk reversal, which is the price difference between a call and put option of a currency. This measures how disproportionately market participants are willing to pay to hedge against appreciation or depreciation of the currency. The relationship between the risk reversal of a currency and global risk aversion is estimated by means of both parametric and non-parametric regressions which allow us to capture the relationship in times of extreme adversity, i.e., tail risk. Our empirical results suggest that the Japanese yen and, to a lesser extent, the Hong Kong dollar are the only safe haven currencies under stressful conditions out of 34 currencies vis-a-vis the US dollar.

Swiss Franc’s One-Sided Target Zone During 2011-2015

The empirical results show that after the introduction of the three refinements to the Linked Exchange Rate system in May 2005 the Hong Kong dollar follows a bounded process that is consistent with a fully credible exchange rate band. The bounded process will limit the movements of the exchange rate to between the strong- and weak-side limits because its variance vanishes at the Convertibility Undertakings making it inaccessible to the limits. The Hong Kong dollar does not show any strong tendency to revert towards the centre of the Convertibility Zone. This is perhaps not surprising as there have been no interventions in the foreign exchange market since May 2005. There may be few forces or incentives for market participants to drive the exchange rate towards 7.80.