Deciding on the Hong Kong jurisdictional CCyB rate

3.5.1. Guided discretion. As discussed above, whilst the Initial Reference Calculator is intended to provide a degree of guidance to the MA and to the market, the MA will retain discretion to diverge from the Initial Reference Calculator if the MA considers that there is strong evidence to support an alternative course of action for the purpose of mitigating systemic risk or instability within the banking system in Hong Kong. In other words, discretion will be retained to cater for volatile, fast moving and hitherto unforeseen circumstances affecting the local economy, as well as any potential for the quantitative indicators incorporated within the Initial Reference Calculator to miss important systemic risk factors.

3.5.2. Preliminary considerations. Once a macro-prudential policy stance has been adopted, the MA will consider:

 whether evidence in support of a “tightening” or

“loosening” stance is sufficiently strong as to warrant divergence from the Initial Reference Calculator (by determining a different course of action with regard to the activation, increase, decrease or release of the CCyB in Hong Kong);

 what additional tools (if any) could or should appropriately be deployed to support or complement the effects of the CCyB (see para. 3.5.6 below); and

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 whether, given the circumstances, the MA should elect not to take any action but to wait until a subsequent date upon which updated information can be reviewed to decide whether action is warranted.¹⁶

3.5.3. Decision when adopting a “neutral” macroprudential policy stance. If a “neutral” macroprudential policy stance is adopted, then the CCyB decision will be in line with the policy signalled by the Initial Reference Calculator as noted in para. 3.2.1 above.

3.5.4. Decisions when adopting a “tightening” policy stance. If a “tightening” macroprudential policy stance is adopted:

 Case where the Initial Reference Calculator does not signal an Indicative CCyB Ceiling. In a situation where the Initial Reference Calculator signals excessive credit growth indicating either the activation of the CCyB or a change in the level of the CCyB rate in accordance with the Composite CCyB Guide based on the “primary gap indicators”, a

“tightening” stance may warrant:

- a higher CCyB rate level (and thus a faster build-up or slower decrease), relative to the indicative level signalled by the Initial Reference Calculator¹⁷ (see below the criteria for setting a CCyB rate higher than 2.5% in extraordinary circumstances); and/or

16 In so far as they may help obtain a more complete or accurate view of relevant circumstances, the above considerations and related discussions could also lead to a revision of the previously determined macroprudential policy stance.

17 This includes the case where, as set out in BCR §[…], the MA may, following consultation with the Banking Advisory Committee, the Deposit-taking Companies Advisory Committee, The Hong Kong Association of Banks and The DTC Association, accelerate the phase-in of the Hong Kong jurisdictional CCyB rate relative to the schedule shown in para. 3.2.4 above if the MA reasonably considers that such action is warranted by the extent of any excessive credit growth in Hong Kong during the phase-in period and the MA is satisfied that such variation would have the effect of increasing authorized institutions' resilience to the risks arising from such excessive credit growth.

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- a pre-announcement period for the CCyB rate increase shorter than 12 months (but not shorter than 6 months).

 Setting a CCyB rate higher than 2.5% in extraordinary circumstances. As set out in BCR §[…], the MA may, following consultation with the Banking Advisory Committee, the Deposit-taking Companies Advisory Committee, The Hong Kong Association of Banks and The DTC Association, set the Hong Kong jurisdictional CCyB rate at a level in excess of 2.5% if (i) a Hong Kong jurisdictional CCyB rate at a level of 2.5% has been in effect for a period of not less than 6 months; (ii) the MA is satisfied on reasonable grounds that the pace of credit growth has not slowed to any material extent during that period; and (iii) the MA considers it necessary to set a Hong Kong jurisdictional CCyB ratio in excess of 2.5% to protect AIs from the expected consequences of excessive credit growth and the build-up of system-wide risk in Hong Kong. Without limiting the discretion provided by BCR §[…], the MA intends to use the following guidelines in determining whether conditions (ii) and (iii) above are fulfilled, before considering whether the use of that discretion is necessary:

- The quarterly year-on-year rate of growth of the aggregate credit measure¹⁸ used to calculate the credit/GDP gap (see Annex 1) has not decreased by more than [20%] percent of the year-on-year growth rate as of the quarter-end date immediately before the 2.5% Hong Kong jurisdictional CCyB rate came into effect;

18 The quarterly year-on-year growth rate of the credit measure is the rate of change expressed as a percentage relative to the value of the credit measure as of the end of the corresponding quarter of the previous year.

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- The uncapped¹⁹ Basel Common Reference Guide and the uncapped Property Buffer Guide (see para.

3.2.2 above) both indicate a CCyB rate higher than 3.5% or either of them indicates a CCyB rate higher than 4.5%, after both have been above 2.5% for at least 6 months since a 2.5% Hong Kong jurisdictional CCyB rate last became effective; and

- The Comprehensive Reference Indicators unambiguously confirm the picture provided by the Guides and the need to additionally bolster AIs’

resilience for the purpose of protecting AIs and the Hong Kong banking system from the expected consequences of excessive credit growth and the build-up of system-wide risk in Hong Kong. In this context, the MA will consider the pace of aggregate credit growth to be excessive if the quarterly year-on-year rate of growth of the aggregate credit measure used to calculate the credit/GDP gap still exceeds [15%].

 Case where the Initial Reference Calculator signals an Indicative CCyB Ceiling. In a situation where the Initial Reference Calculator signals banking system stress indicating the reduction or release of the buffer through an Indicative CCyB Ceiling based on the

“primary stress indicators” (see Table 2), a

“tightening” stance may warrant:

- a slower buffer release through a higher CCyB ceiling relative to that indicated by Table 2; or

- a shorter minimum ceiling duration relative to that indicated by Table 2, if there were extraordinary unforeseen circumstances where the preservation of financial stability might require renewed buffer build-up at an earlier point in time; or

19 The “uncapped” Guides referred to here are the Guides calculated using the respective formula that maps the corresponding primary gap indicators to the resulting CCyB rate guide, but without subjecting the latter to an upper limit (i.e. 2.5% or its phase-in value during 2016 to 2019).

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- conceivably, if other indicators convincingly show that the banking system is in fact entering, or about to enter, a phase of excessive credit growth, even a return to CCyB build-up.

3.5.5. Decision when adopting a “loosening” prudential policy stance. If a “loosening” macro-prudential policy stance is adopted:

 Case where the Initial Reference Calculator does not signal an Indicative CCyB ceiling. In a situation where the Initial Reference Calculator signals excessive credit growth indicating either the activation of the CCyB or a subsequent change in the level of the CCyB rate in accordance with the Composite CCyB Guide based on the “primary gap indicators”, a “loosening” stance may warrant:

- a lower CCyB rate level (and thus a slower build-up or faster decrease), relative to the indicative level signalled by the Initial Reference Calculator;²⁰ or - conceivably if other indicators convincingly show

that the banking system is in fact encountering, or is about to encounter, significant stress (in spite of the Initial Reference Calculator signalling excessive credit growth), announcing an indicative CCyB ceiling lower than the CCyB rate indicated by the Initial Reference Calculator, or at the extreme, a complete release of the active CCyB), with a corresponding indicative minimum ceiling duration, while explaining that the MA no longer views the banking system as being in a phase of excessive credit growth.

 Case where the Initial Reference Calculator signals an Indicative CCyB Ceiling. In a situation where the Initial Reference Calculator signals banking system stress indicating the reduction or release of the buffer

20 However, the pre-announcement period for a CCyB rate increase cannot be extended beyond 12 months.

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through an Indicative CCyB Ceiling based on the

“primary stress indicators” (see Table 2), a

“loosening” stance may warrant:

- a swifter buffer release through a lower Indicative CCyB Ceiling relative to that indicated by Table 2 ,or at the extreme, a complete release of the CCyB;

and/or,

- a longer indicative minimum ceiling duration relative to that indicated by Table 2.

3.5.6. Deployment of other macroprudential policy instruments. It should always be borne in mind that the use of the CCyB is only one of a variety of macroprudential measures which may be deployed with a view to enhancing banking sector resilience and containing systemic risk. Therefore, if the MA should elect to diverge from the Initial Reference Calculator, the MA may at the same time seek to deploy other alternative or complementary measures designed to achieve the MA’s objectives in promoting the general stability and effective working of the local banking system. Examples of such complementary measures might include caps on the loan-to-value (“LTV”) ratio and the debt servicing ratio (“DSR”) in respect of residential mortgage loans as well as sectoral risk weight floors.

3.6. Public communication regarding the Hong Kong