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HK releases liquidity requirements for banks

Monday 4 April 2011 - by Nicola York

Hong Kong is to adopt a phased in approach to enhancing its liquidity regime to comply with new global standards and has issued statutory guidelines to HK banks.

The Hong Kong Monetary Authority says the boards of all authorised institutions will be required to set out their liquidity risk tolerance and implement new liquidity strategies in line with this.

There should be appropriate internal risk pricing frameworks to ensure liquidity costs are properly measured.

The guidelines, which are being implemented following the Basel III accord, say that banks should have appropriate funding strategies which provides for effective diversification of funding sources, and that has a process for regularly gauging its fund-raising capacity from each of the sources.

Banks will be expected to provide stress testing for liquidity risk which captures "severe but plausible" stress scenarios, including prolonged market-wide disruptions.

Institutions will be expected to upgrade their existing systems and controls to meet the new standards "as soon as is practicable" and will be allowed to agree an implementation plan with the HKMA within four months, and a grace period of up to 12 months.

But they will be given a longer period to implement the liquidity cushion requirements, with the implementation date to be announced later this year.

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