## Remarks on fitting macroprudentialstress testing into the broader policy framework

## Source details

**Canonical URL:** [Remarks on fitting macroprudentialstress testing into the broader policy framework](https://www.imf.org/-/media/files/news/seminars/mcm-lse-hui_session7.pdf)

## Other formats

- [Markdown version](/-/media/files/news/seminars/mcm-lse-hui_session7.pdf.md)
- [Structured JSON version](/-/media/files/news/seminars/mcm-lse-hui_session7.pdf.json)

---

### Context and event
- For IMF (MCM)-LSE (SRC) Symposium
- Washington D.C., 15-16 December 2016
- Cho-Hoi Hui, Research Department, Hong Kong Monetary Authority

### Interactions between macroprudential and microprudential policy tools
- Macroprudential policy tools can be the first line of defense for a safe and sound system.
- Microprudential policy tools ensure individual financial institutions have robust financial condition.
- Example: countercyclical capital buffer enhances the overall capital requirement in a banking system, while banking supervisors impose targeted capital adequacy ratios to individual banks.
- Countercyclical capital buffer has improved resilience of the system as a whole.
- Individual banks with prudential concerns should have capital planning for additional capital requirements.

### Implications for macroprudential stress testing
- Given that both macroprudential and microprudential policy tools are likely applied to the system at the same time, macroprudential and microprudential stress tests should be designed with consistent objectives and input parameters.
- Macroprudential policy may have impact on the macro economic condition (e.g. through the credit channel: loan growth and rates); the stress-testing framework should consider the macro-financial feedback effect induced by the macroprudential policy.

### Interactions of macroprudential policy with other policies
- Interactions of macroprudential policy with other policies (in particular monetary policy) are an ongoing research topic in the community.
- Hong Kong’s significant presence of international banks implies that their home countries’ monetary policies will affect those banks’ international lending business and therefore international capital flows.
- Research objective: study how macroprudential policy tools interact with other economies’ monetary policies.

### International transmission of foreign monetary policies to Hong Kong banks (findings)
- The study finds evidence of an international transmission of foreign monetary policies to the Hong Kong banking sector.
- The extent of monetary policy transmission from a country is dependent on how much net cross-border funding of foreign banks in Hong Kong is raised from that country.
- In response to looser monetary policies in major advanced economies (such as the US, the UK and Japan), banks with higher net cross-border funding from these countries’ banking sectors are estimated to increase their USD loan growth more than their peers in Hong Kong.
- A one percentage point decrease in the US monetary policy shadow rate (which takes into account the effect of unconventional monetary policy), foreign banks in Hong Kong are estimated to increase USD loan growth by 1.5 percentage points if the share of net cross-border funding from the US banking sector increase by one standard deviation.
- A bank’s net cross-border funding from foreign banking sectors is an important factor affecting the spillover effect of monetary policies internationally.

### Stable Funding Requirement (SFR) and spillovers
- The Stable Funding Requirement (SFR) was introduced by the HKMA in October 2013.
- The SFR requires those banks with rapid (USD) loan growth to maintain longer term stable funding to support their lending business.
- Preliminary findings show that SFR tends to reduce the spillover effect of foreign monetary policies.
- Banks in Hong Kong that are subject to the SFR are found to have a lower sensitivity of their USD loan growth to foreign monetary policies.

---


_Source: https://www.imf.org/-/media/files/news/seminars/mcm-lse-hui_session7.pdf_