Hong Kong banks' usage of HKMA discount window hits 3-year high in July

HONG Kong banks borrowed a record amount from the central bank in July, as demand from companies paying seasonal dividends and intervention by the monetary authorities in currency markets drove cash levels down.

The scramble for cash lifted interbank rates to a two decade-high and saw banks borrowing HK$8.2 billion (S$1.4 billion) from the Hong Kong Monetary Authority’s discount facility – the highest monthly amount in over three years.

The discount window is an overnight liquidity facility available to banks at the city’s base rate, which is 5.75 per cent, and currently higher than inter-bank rates.

Analysts said banks were forced to tap the discount window more than usual in July as listed corporates needed more Hong Kong dollars to pay dividends, even as the HKMA’s intervention to defend its currency peg drove down the aggregate banking system balance.

The overnight Hong Kong Interbank Offered rate rose as far as 5.6 per cent, a 17-year high in July, as cash conditions tightened.

“Banks normally wouldn’t tap the discount window if the funding demand can be met in the interbank market,” said Sam Wong, an analyst at Jefferies.

Hong Kong’s main policy rate, the base rate, is tethered to rates in the United States by the currency peg that moves in a tight range of 7.75-7.85 per US dollar.

As the US Federal Reserve raised interest rates in one of the fastest tightening cycles since the 1980s, Hong Kong’s base rate has outpaced the rise in interbank rates, the latter more influenced by domestic demand and supply, analysts said.

But banks are also beginning to feel the pinch from a thinning aggregate balance, or interbank cash balance, which since May has stayed below HK$45 billion at the lowest levels since 2008.

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The HKMA does not disclose information about which banks have used the facilities, but banks with a higher ratio of liquid assets appear not to have needed to borrow from the monetary authority.

“With our liquidity coverage ratio at over 230 per cent and above the regulatory requirement, we are able to plan our liquidity need for the second half, said Saw Say Pin, Hang Seng Bank’s chief financial officer. “...we have not tapped the discount window”.

The July spurt in use of the discount window may be a one-off, as the seasonal dividend pressures will fade after August and interbank rates would then likely ease, said Kiyong Seong, lead Asia macro strategist at Société Générale. REUTERS