## _wp14119

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### Characteristics of international financial centers (IFCs)
- IFCs concentrate diversified domestic and foreign financial institutions, sophisticated infrastructure, and robust legal and regulatory frameworks.
- Agglomeration or cluster effects widen provision of services at competitive prices.
- IFCs typically feature:
  - a strong degree of openness,
  - presence of foreign entities,
  - connections to a wide range of international market participants.
- Financial centers tend to compete more within their time zones than across them; New York City and London are the largest by far.

### Regional centers, incumbency, and historical development
- Regional fragmentation and niche markets deepen intermediation and connect regions to the global financial network.
- Asia lacks a single global IFC; Japan operates primarily as a domestically-centered market; Kuala Lumpur plays an important role in Islamic finance; Hong Kong SAR and Singapore provide the strongest financial connections between Asia and the rest of the world.
- Incumbency advantages:
  - Early mover advantage and accumulated agglomeration benefits make Hong Kong SAR and Singapore difficult to supplant.
  - Replicating incumbents’ advantages requires concerted efforts across market infrastructure, legal/regulatory frameworks, talent attraction, and consistent policy support.
- Historical evolution:
  - Both cities evolved from trading/trans-shipment hubs and liberalized financial sectors since the 1970s.
  - Singapore initiated Asian Dollar Market (ADM) activities in 1968 with government incentives; Hong Kong SAR lifted an initial moratorium on banking licenses in 1978 and reduced withholding on foreign currency interest.

### Recognition, rankings, and interconnectedness
- Global Financial Centers Index (GFCI) survey of 2,700 financial service providers has consistently ranked Hong Kong SAR and Singapore just after London and New York City across many activities.
- Selected GFCI rankings (excerpted):
  - Investment management: Hong Kong SAR 3, Singapore 4
  - Banking: Hong Kong SAR 2, Singapore 4
  - Gov & regulatory: Hong Kong SAR 3, Singapore 5
  - Insurance: Hong Kong SAR 4, Singapore 3
  - Professional services: Hong Kong SAR 3, Singapore 4
  - Human capital: Hong Kong SAR 3, Singapore 4
  - Business environment: Hong Kong SAR 3, Singapore 4
  - Financial sector development: Hong Kong SAR 3, Singapore 4
  - Infrastructure: Hong Kong SAR 3, Singapore 4
  - Reputational factors: Hong Kong SAR 3, Singapore 4
- Interconnectedness measured by eigenvector centrality:
  - Hong Kong SAR’s and Singapore’s banking systems are moderately interconnected—on par with Australia.
  - In debt and especially equity markets, their interconnectedness ranks among the top dozen globally (after China for equity and Switzerland for debt).
- IMF mandatory financial stability amendment 2013 update lists:
  - Hong Kong SAR as the 19th most important financial center.
  - Singapore as the 23rd most important financial center.

### Growth, projections, and post-crisis shifts
- Since the global financial crisis both centers gained prominence as deleveraging elsewhere and rapid recoveries in Asian EMs increased their attractiveness.
- Post-crisis shifts:
  - Singapore became substantially more interconnected in the global banking system and in global debt market exposures.
  - Hong Kong SAR became more interconnected in global equity markets.
- Projection methodology (as applied):
  - Assume each bilateral exposure grows by the weighted average of both countries’ nominal GDP projections until 2018 (WEO October 2013 forecast horizon), and at similar rate as in 2018 until 2023.
  - Forecasts suggest Hong Kong SAR’s interconnectedness in equity markets and Singapore’s interconnectedness in debt markets are set to grow faster than those of London or New York, although levels remain well below those incumbents.

### Foreign exchange markets and business lines (selected statistics)
- Hong Kong SAR’s currency board with the U.S. dollar since October 1983 has promoted its currency’s use as a proxy for the US dollar in futures and option hedging.
- Geographical distribution of forex market turnover (in percent) examples presented: 3.8, 4.1, 6.9, 5.7, 32.6, 40.9.
- Aggregate Assets Under Management series (1999–2011) show rapid growth in both jurisdictions.
- Equity market capitalization:
  - Singapore’s securities market: grew from $34 billion in 1990 to $770 billion in 2013.
  - Hong Kong SAR stock market capitalization: $3 trillion as of November 2013.
  - Number of listed companies in Hong Kong SAR: 1,602 as of October 2013.
  - Hong Kong SAR and Singapore account for 4.8 percent and 1.2 percent of the world aggregate equity market domestic capitalization, respectively; and 16.4 percent and 4.8 percent when compared to equity market capitalization of Asian countries.

### Renminbi (RMB) business
- Hong Kong SAR (2013 HKMA figures):
  - Renminbi trade settlement: RMB3,841 billion in 2013.
  - Stock of outstanding renminbi bonds: RMB310 billion at end-2013.
  - Total issue size of the renminbi sovereign bond market: RMB8 billion in 2010 and RMB23 billion in 2013.
  - Outstanding renminbi loans: RMB116 billion at end-2013.
  - Renminbi customer deposits and outstanding certificates of deposit issued by banks: RMB1,053 billion at end-2013.
- Hong Kong SAR has become the premier offshore hub for renminbi trading, settlement, financing and wealth management.
- Singapore developments:
  - ICBC Singapore appointed as Singapore’s Renminbi clearing bank in February 2013.
  - SWIFT press releases cited Singapore overtaking London as the top RMB offshore clearing centre after Hong Kong (April 2014) and ranking first outside China and Hong Kong in use of RMB for trade finance (October 2013).
  - SGX and HKEx signed an MOU in December 2013 to collaborate on yuan-denominated product development.

### Bond and equity markets
- Bond markets:
  - Both Hong Kong SAR and Singapore are midsized international bond markets, smaller than London, Luxembourg, the US, and Ireland.
  - Expansions since 1995: fivefold in Hong Kong SAR; tenfold in Singapore.
  - Issuance predominantly in local currencies: 67 percent in Hong Kong SAR; 77 percent in Singapore.
  - Hong Kong SAR issuance composition: private sector debt dominates at 64 percent.
  - Singapore issuance composition: government and private debt about half each (47 percent and 53 percent).
  - Singapore: over a quarter of total annual issuance from foreign entities.
- Equity markets:
  - SEHK capitalization almost four times SGX.
  - Half of companies listed in Hong Kong SAR come from Mainland China.

### Fund management and asset management hubs
- Assets under management growth since 1999:
  - Almost six-fold in Singapore and four-fold in Hong Kong SAR.
- Hong Kong SAR hosts the largest number of fund managers and the largest pool of hedge fund assets ($87 billion for Hong Kong SAR against $63 billion in Singapore).
- Asset allocation predominantly invested overseas and broadly equally divided between stocks and bonds.
- Asian-Pacific markets account for 70 percent of assets for Singapore and 80 percent for Hong Kong SAR.
- Singapore fund management: 80 percent of assets managed by 600 firms originate outside Singapore; 86 percent of assets are then invested elsewhere.

### Market infrastructure and insurance sectors
- Hong Kong SAR:
  - Central Moneymarkets Unit (CMU) for debt and securities settlement; RTGS for interbank HKD payments; OTC Clear by HKEx for OTC derivatives clearing.
- Singapore:
  - Two central counterparties (CDP; SGX-DC); MAS Electronic Payment System (MEPS+); SGX-DC link with Chicago Mercantile Exchange (CME).
- Insurance:
  - Singapore: insurance sector (primarily life) is second largest component of financial sector assets after banks, with 6 percent of assets (48 percent of GDP versus 12.5 percent in Hong Kong SAR).
  - Hong Kong SAR hosts 155 insurers, 73 foreign.
  - Singapore hosts more than 250 insurance players, over 90 percent foreign.
  - Reinsurance premiums (2012): Singapore US$3.2 billion; Hong Kong SAR US$1.32 billion.

### Drivers of growth — methodology
- Constant market share decomposition applied to foreign IPOs and bond issuances to separate:
  - Structural effect (change in composition of foreign issuers).
  - Competitiveness effect (change in IFC’s share holding issuer composition fixed).
  - Third term for first-time issuances (many-zeros mitigation; economic interpretation ambiguous).
- Dataset: Dealogic matrix of bilateral IPOs and bond issuances among 31 economies for every year 1998–2012; bond dataset covers about 85 percent of international bonds issued in sample countries.
- Sample countries include 11 Asian economies (Hong Kong SAR, Singapore, China, Japan, India, Korea, Malaysia, Taiwan Province of China, Indonesia, Thailand, Philippines), United States, Canada, 12 European countries, Brazil, Mexico, Saudi Arabia, United Arab Emirates, South Africa, Australia.

### IPO findings (1998–2012 decomposition highlights)
- Aggregate change 1998-2002 to 2003-2007:
  - Hong Kong SAR: international IPO volume jumped by 424 percent.
  - Singapore: international IPO volume jumped by 1,565 percent (from US$ 470 million base).
- Drivers (selected figures):
  - Hong Kong SAR: change in shares of foreign issuers contributed 232 percent.
  - Singapore: change in foreign-issuer shares 93 percent; competitiveness contribution 718 percent; first-time issuances contribution 784 percent.
  - IPOs from China in Hong Kong SAR rose from about US$ 20 billion in 1998-2002 to US$ 122 billion in 2003-2007 (more than six-fold), accounting for almost the entire international IPOs in Hong Kong SAR during 2003-2007.
- Post-crisis 2008–2012:
  - Hong Kong SAR: Chinese IPOs declined to US$ 89 billion, a drop of 26 percent from 2003-2007; first-time issuances contributed about 15 percent to Hong Kong SAR’s growth; competitiveness effect 3 percent.
  - Singapore: mix of foreign issuers among emerging Asian countries contributed -12 percent relative to the world; improvement in competitiveness more than offset this, leading to net growth of 38 percent.

### International bond markets findings (1998–2012 decomposition highlights)
- 1998–2002 to 2003–2007:
  - Singapore: international bond issuances more than doubled (about US$ 55 billion to US$ 115 billion); relative growth 44 percent.
    - Competitiveness effect about 13 percent.
    - Structural effect -22 percent.
    - First-time issuers contributed 55 percent (China US$ 5 billion, India US$ 12 billion, Thailand US$ 5 billion, Malaysia US$ 3 billion).
  - Hong Kong SAR: issuances declined from US$ 12 billion to US$ 11 billion; -76 percent relative to world growth; loss of competitiveness -112 percent; mitigated by first-time issuances from Malaysia (US$ 1.8 billion), Thailand (US$ 0.3 billion), and the United Kingdom (US$ 1.4 billion).
- Post-crisis 2008–2012:
  - Singapore: issuances increased 134 percent from US$ 115 billion to US$ 273 billion.
    - Of the 134 percent growth: about 65 percent due to change in issuer composition toward Asian countries (notably China).
    - About 68 percent due to Singapore’s gain in competitiveness.
  - Hong Kong SAR: growth of 261 percent, predominantly driven by structural effect (234 percent).
    - China-originated issuances climbed from about US$ 8 billion in 2003-2007 to US$ 37 billion in 2008-2012, comprising about 90 percent of total international issuances during 2008-2012.
  - New York: relative growth 91 percent in post-crisis period, mainly reflected sustained increase in competitiveness (80 percent).
  - London: benefited relatively more from structural effect.

### Network shock-propagation model — design and scenarios
- Model mechanics:
  - Probabilistic shock propagation on a network of bilateral exposures.
  - Initial shock hits a country with likelihood proportional to interconnectedness.
  - Source country cuts exposures; larger exposures more likely to be cut.
  - Deleveraging transmits shocks in rounds (“steps”); once a link is severed it cannot be re-established.
  - Experiment repeated 1000 times; network unweighted to focus on speed of contagion.
- Stylized network structure:
  - Three regions: Asia (including Hong Kong SAR, Singapore, China, and eight other Asian countries), a global financial center linking Asia to the rest of the world (UK or US), and the rest of the world.
  - No explicit Hong Kong SAR–Singapore direct link in the stylized network to capture geographic differentiation.
- Scenarios:
  1. Specialization/complementarity: Hong Kong SAR intermediates exposures to China; Singapore intermediates exposures to the rest of Asia.
  2. Competition: Hong Kong SAR and Singapore both intermediate the rest of the world’s exposures to Asia.
  3. Supplanting: One center supplants the other (e.g., Hong Kong SAR becomes sole center for Asia).

### Shock propagation results and interpretation
- General results:
  - Global shocks propagate more slowly when Hong Kong SAR and Singapore remain specialized/complementary or one shrinks than when both compete for the same markets.
  - Competing centers create overlapping exposures, increasing probability that partner countries receive shocks from either center.
- Shocks originating in China:
  - A shock in China travels faster through a single-center network than with two specialized centers.
  - Singapore can act as a buffer between China and the rest of Asia, slowing contagion.
  - As China integrates into the global financial system, the stabilizing contribution from a separate Singapore increases (gap between propagation curves widens).
- Conceptual limits:
  - Results address speed of contagion rather than magnitude of losses because links are severed rather than partially reduced.
  - Curves are highly nonlinear due to distinct regional network structure.

### Policy-relevant implications from network experiments
- Coexistence of Hong Kong SAR and Singapore as specialized, complementary centers may materially slow propagation of shocks regionally and globally compared with direct competition or single-center dominance.
- The stabilizing role of additional centers depends on their differentiation; centers serving as buffers between shock sources (e.g., China) and other countries increase network stability.
- Excessive competition that increases overlapping exposures may engender destabilizing complexity and interconnectedness, offsetting some micro-efficiency gains.

### Banking systems, foreign bank presence, and dominant business models
- Chinese banks' market shares of total banking assets in Hong Kong SAR grew from 19 percent in 2009 to close to 29 percent in 2013.
- Many Chinese banks use Hong Kong SAR operations to fund in US and Hong Kong dollars and re-invest in China.
- Presence of Chinese banks in Singapore is very limited.
- Banking system scale (2012):
  - Hong Kong SAR: banking system assets equal 727 percent of GDP.
  - Singapore: banking system assets equal 560 percent of GDP.
- Composition of banks (presented):
  - Hong Kong SAR licensed banks: foreign branches 89%, foreign subsidiaries 6%, local banks 5%; largest four foreign banks account for one half of banking system assets.
  - Singapore commercial banks: foreign branches 95%, foreign subsidiaries 1%, local banks 4%; commercial banks account for 77.8% of financial system assets.
  - Claims of foreign banking sector on Hong Kong SAR (in percent): United States 18%, United Kingdom 28%, Japan 14%, Switzerland 9%, France 6%, Other 25%.
  - Claims of foreign banking sector on Singapore (in percent): United States 89%, United Kingdom 6%, Japan 5%.
- Dominant bank strategies:
  1. Deposit-led retail and commercial banking (local deposits funding local/regional lending).
  2. Investment-led model (branches of large foreign banks funded by parent or capital markets).
- Concentration:
  - HSBC Group, Standard Chartered Bank (SCB), and Citigroup together hold 23 percent of bank assets in Singapore.
  - Together with Bank of China, they hold 53 percent of bank assets in Hong Kong SAR.
- Incorporation and supervisory implications:
  - HSBC: Hong Kong SAR subsidiary with a branch in Singapore.
  - SCB: subsidiary in Hong Kong SAR; incorporated a subsidiary in Singapore in October 2013 while maintaining other operations under a branch.
  - Citibank: both a subsidiary and a branch in Singapore.
  - Incorporation status affects supervisory powers and application of capital regulations; prudential risk management requirements applied across Authorized Institutions, subsidiaries and branches in both jurisdictions.

### Regulation, supervisory arrangements, and international cooperation
- Post-crisis regulatory stance shifted toward stricter oversight; well-regulated centers with sound prudential requirements may be viewed as safe havens.
- Both Hong Kong SAR and Singapore favor strict, transparent regulation and timely adoption of the global regulatory agenda.
- Participation in regional/global fora:
  - MAS and HKMA members of BCBS and FSB; participate in ASEAN Capital Market Forum, ASEAN+3 (CMIM, ABMI), and EMEAP.
  - Singapore hosts IMF’s Training Institute for Asia and CMIM’s surveillance unit AMRO.
  - HKMA chaired EMEAP Monetary and Financial Stability Committee.
- Regulatory cooperation and priorities include business model reviews and potential relocation of activities in response to structural measures (Volcker, Vickers, Liikanen).
- Challenges hosting G-SIBs:
  - Size and systemic relevance relative to local banking assets, GDP, and reserves.
  - Need for joint surveillance and crisis management for complex foreign bank structures.
  - HKMA participates in 9 CMGs; MAS participates in 7 CMGs.

### Regulation of foreign banks and hedge funds — specific measures
- Licensing and prudential standards:
  - HKMA and MAS impose strict standards comparable to domestic banks; may require local incorporation for retail access.
  - Singapore: full and wholesale branches must observe minimum asset maintenance ratio (AMR) of 35 and 15 percent respectively.
  - Foreign branches typically hold minimum liquidity assets equivalent to 16 percent of qualifying liabilities and must maintain minimum cash balances.
  - MAS has resolution powers and can impose corrective/remedial actions on branches.
  - Hong Kong SAR: liquidity requirements apply; new LCR (Category 1 banks) and Liquidity Maintenance Ratio (Category 2 banks) will apply to foreign branches; a proposed resolution regime (January 2014) will extend to branches.
- Hedge funds:
  - MAS requires asset and hedge fund managers operating in Singapore to either hold a capital markets license or be registered.
  - Hong Kong SAR and the United Kingdom are tightening regulation and surveillance of hedge funds.

### Basel III implementation and supervisory comparisons
- Both jurisdictions published final Basel III regulations effective since January 1, 2013.
- Selected Basel III / FSB minimums and jurisdictional features:
  - Basel III / FSB minimum standards: CET1 4.5%, Tier 1 6%, Total Capital (TC) 8%.
- Hong Kong SAR:
  - Minimum standards: CET1 4.5%, Tier 1 6%, TC 8%.
  - SIFIs capital surcharge: 1%-2.5% (planned; consultation ongoing); most banks have a Pillar 2 add-on.
  - Conservation Buffer: 2.5%
  - Countercyclical Buffer (CCB): 0% to 2.5%
  - LCR: >100%
  - NSFR: >100%
  - Leverage ratio: >3%
  - Implementation schedule: Minimum capital by 2015; LCR 01/2015; NSFR 01/2018; Leverage ratio 01/2018.
  - Scope: “Internationally active banks” (and/or banks significant to the Hong Kong SAR banking system).
- Singapore:
  - Minimum standards: CET1 4.5%, Tier 1 6%, TC 8%.
  - Singapore applies higher internal minimums for locally incorporated banks: CET1 6.5%, Tier 1 8%, TC 10%.
  - Conservation Buffer: 2.5%
  - Countercyclical Buffer: up to 2.5% (higher at MAS discretion).
  - SIFIs capital surcharge: Yes, under Pillar 1 for domestic SIFIs.
  - LCR: >100%
  - NSFR: >100%
  - Leverage ratio: 3% is tested; await Basel III calibration.
  - Implementation schedule: 2013 (TC) to 01/2015 for certain measures; LCR 01/2015; NSFR 01/2018; Leverage ratio 01/2018.
  - Scope: All reporting banks (standalone & group level); all internationally active banks.
- Notes:
  - Hong Kong SAR follows Basel timetable phased from January 2013; banks have generally satisfied/exceeded Basel III minimums.
  - MAS implemented certain capital requirements earlier (two years ahead).

### Domestic SIBs, macroprudential frameworks, and resolution
- No global SIBs headquarters located in Hong Kong SAR and Singapore.
- Both jurisdictions can rely on Pillar 2 to impose higher capital requirements (not necessarily disclosed).
- Hong Kong SAR consulting to include higher loss absorbency under G-SIB and D-SIB frameworks with view to place under Pillar 1.
- Macroprudential track record:
  - MAS (since 2009) introduced measures: lower LTV limits, buyer’s and seller’s stamp duties, caps on debt service to income ratio, caps on loan tenures.
  - HKMA measures: strict maximum LTV ratios, caps on debt servicing ratios (DSR), regulatory reserve requirement in addition to IAS 39 collective impairment allowance (CIA).
- Resolution mechanisms:
  - MAS and HKMA tasked with resolution powers; MAS currently has a more complete toolkit.
  - Hong Kong SAR proposed a resolution regime in January 2014 covering banks, securities and futures companies, insurers, and FMIs aligned with FSB principles.
- Structural measures:
  - Neither Singapore nor Hong Kong SAR have adopted structural measures (Volcker, Vickers, Liikanen) to date.

### Strategic conclusions and recommendations
- Centrality: Hong Kong SAR and Singapore have increased in size and interconnectedness and are projected to become even more interconnected.
- Complementarity: Network analysis suggests financial stability is enhanced if the two operate as complementary centers across geographic clientele and asset markets; excessive competition could increase destabilizing interconnectedness.
- Credibility and resilience:
  - Preserve sound financial systems via effective regulation, intensive supervision, and strong fiscal and external buffers.
  - Foster collaboration on connectivity and infrastructure regulation.
- Market deepening strategies:
  - Deepen markets, raise liquidity and tradability, broaden investor base, and step up outreach and bilateral/multilateral cooperation.
- Financial infrastructure goals:
  - Build multi-currency, multi-dimensional trading, investment, clearing, and processing platforms to be robust payment and settlement hubs connected to other IFCs.
- Strategic challenges:
  - Hong Kong SAR must balance servicing Mainland China’s needs and preserving international character and policy autonomy.
  - Singapore needs long-term risk-based regional strategies and deeper debt, stock, insurance, and asset management markets to attract foreign interest and innovation; expected to remain a “safe haven” in South/South East Asia.
- Regional role:
  - Hong Kong SAR and Singapore could boost financial integration in Asia, link Asia and niche regional centers to global financial centers, foster economic growth and financial resilience in Asia, and support development of pan-Asian banking groups.

*Source: Excerpt from IMF working paper content unit _wp14119*

### 1.      International  financial  centers are  characterized  by  the concentration of a  large

### International financial centers are characterized by the concentration of a large

### Characteristics of international financial centers (IFCs)
- IFCs concentrate a large number of diversified domestic and foreign financial institutions offering a multitude of financial services, backed by sophisticated and robust infrastructure, and robust legal and regulatory frameworks (Elliott, 2011; Jarvis and Mainelli, 2006).
- “Agglomeration” or “Cluster” effects widen the provision of services, generally at competitive prices.
- A large domestic market is not sufficient; IFCs typically enjoy:
  - a strong degree of openness,
  - presence of foreign entities,
  - connections to a wide range of international market participants.
- Large financial centers roughly correspond to major bands of time zones worldwide; New York City and London are the largest by far. Financial centers tend to compete more within their time zones than across them.

### The role of regional centers
- Global financial consolidation has been accompanied by regional fragmentation and emergence of niche markets that cater to local needs.
- Regional financial centers deepen intermediation and offer tailor-made services while connecting regions to the global financial network.
- Asia lacks a single global IFC and relies on several regional and niche centers:
  - Japan operates primarily as a domestically-centered market (see Box 1).
  - Kuala Lumpur plays an important role in Islamic finance.
  - Hong Kong SAR and Singapore provide the strongest financial connections between Asia and the rest of the world and are closer to international financial centers as defined above.

### The power of incumbency
- Emerging Asian financial centers could broaden scale and scope but face significant challenges as alternatives to Hong Kong SAR and Singapore due to “early mover advantage” and accumulated agglomeration benefits.
- Historical parallel: once London’s City reached critical mass, Frankfurt and Paris, while retaining domestic functions, faded in relative importance as international centers.
- As incumbents, Hong Kong SAR and Singapore benefit from:
  - growing markets,
  - deep pools of expertise,
  - robust and stable market infrastructure,
  - solid legal, regulatory and supervisory frameworks.
- Replicating these advantages elsewhere requires concerted efforts across these dimensions, attraction of strong talent, and consistent policy support.

### Recognition and rankings
- Since 2007, the Global Financial Centers Index (GFCI), a semi-annual survey of 2,700 financial service providers, has consistently ranked Hong Kong SAR and Singapore just after London and New York City in almost all financial market activities.
- Tables (excerpted): Hong Kong SAR and Singapore rank similarly for financial market presence and competitiveness across segments such as:
  - Investment management: Hong Kong SAR 3, Singapore 4
  - Banking: Hong Kong SAR 2, Singapore 4
  - Gov & regulatory: Hong Kong SAR 3, Singapore 5
  - Insurance: Hong Kong SAR 4, Singapore 3
  - Professional services: Hong Kong SAR 3, Singapore 4
  - Human capital: Hong Kong SAR 3, Singapore 4
  - Business environment: Hong Kong SAR 3, Singapore 4
  - Financial sector development: Hong Kong SAR 3, Singapore 4
  - Infrastructure: Hong Kong SAR 3, Singapore 4
  - Reputational factors: Hong Kong SAR 3, Singapore 4

### Interconnectedness and centrality
- Importance can be measured by interconnectedness, defined as eigenvector centrality (the weighted average of counterparties’ interconnectedness).
  - Eigenvector centrality is preferred because it accounts for weighted exposures of different sizes.
- Among financial centers:
  - Hong Kong SAR’s and Singapore’s banking systems are moderately interconnected—on par with Australia.
  - In debt and especially equity markets, their interconnectedness ranks among the top dozen globally, after China (equity) and Switzerland (debt).
- IMF mandatory financial stability amendment 2013 update lists:
  - Hong Kong SAR as the 19th most important financial center.
  - Singapore as the 23rd most important financial center.

### Growing centrality and projected trends
- Since the global financial crisis, both centers have gained further prominence as deleveraging elsewhere and rapid recoveries in Asian EMs increased their attractiveness.
- Post-crisis shifts:
  - Singapore became substantially more interconnected in the global banking system and in global debt market exposures.
  - Hong Kong SAR became more interconnected in global equity markets.
- Projection methodology (as applied in the source):
  - Assume each bilateral exposure grows by the weighted average of both countries’ nominal GDP projections until 2018 (forecast horizon of the October 2013 World Economic Outlook), and at similar rate as in 2018 until 2023.
  - Forecasts suggest Hong Kong SAR’s interconnectedness in equity markets and Singapore’s interconnectedness in debt markets are set to grow faster than those of London or New York, although their levels will remain well below those incumbents.

### The rise of Hong Kong SAR and Singapore as IFCs
- Historical development:
  - Both cities evolved from trading and trans-shipment hubs (Singapore: South China Sea–Indian Ocean route; Hong Kong SAR: gateway in Northeast Asia and to China).
  - Both benefited from trade growth, infrastructure improvements, and expanded banking facilities since the 1970s.
- Asian Dollar Market (ADM):
  - The ADM’s creation was central to Singapore’s development: Singapore started ADM activities in 1968 with government incentives and preferential tax treatments for Asian Currency Units (ACU).
  - Hong Kong SAR initially imposed a moratorium on banking licenses and a 15 percent withholding tax on interest from foreign currency deposits; the moratorium was lifted in 1978, after which Hong Kong SAR took a more active role in debt markets.
  - Both cities liberalized to open financial sectors to foreign banks and institutions.

### China and Hong Kong SAR
- Hong Kong SAR has benefited from access to China’s internal market.
- Policy changes to China’s financial sector were often piloted in Hong Kong SAR (e.g., quota regimes for portfolio flows, measures to encourage international use of the renminbi).
- Introduction of “H shares” allowed Mainland China–incorporated companies to be traded on the Hong Kong Stock Exchange, fostering financial links with China.

### Growing Asian bond markets
- Since 2008, the Asian bond market grew 2.4 times (from $200 billion to $480 billion).
- This reflects a regional shift from heavy surpluses toward greater reliance on markets to fund growing demand from consumption and investment.
- Primary issuance by Asian borrowers is growing and the majority of allocation of credit securities are now made to Asian investors, reflecting a re-balancing of the investor base into the region.

### Role of government policies and support
- Singapore’s development as an IFC involved active government policies:
  - internationally competitive tax structures,
  - promotion of a well-regulated financial system,
  - MAS (Monetary Authority of Singapore) tasked with multiple policy roles including monetary policy, foreign reserves management, financial stability, fostering a sound financial center, micro- and macro-prudential supervision, and acting as resolution authority.
- Hong Kong SAR’s success described as largely “laissez faire,” with financial sector growth generally left to market forces (e.g., Mandatory Provident Fund—MPF—management left to the private sector versus Singapore’s CPF largely government-managed).
- Both jurisdictions introduced measures to encourage debt market development:
  - improving clearing infrastructure (e.g., Central Moneymarket Unit—CMU in Hong Kong SAR),
  - promoting Exchange Fund Notes in the retail market,
  - expanding profits tax concession schemes,
  - streamlining regulations on issuing and listing debt securities,
  - establishing full benchmark yield curves with greater tenors,
  - expanding from government debt to corporate debt.
- Singapore joined cross-border securities offering standards implementation by ASEAN (with Malaysia and Thailand), enabling issuers offering equity and plain debt securities in multiple ASEAN jurisdictions to comply with a single set of disclosure standards.

### Tokyo and Japan as context (Box 1)
- From mid-1960s through early 1990s, Japan dominated Asia’s financial landscape; it remains the third largest financial market by size after New York and London but its relative importance in Asia has diminished.
- Tokyo is now perceived more as a domestic financial center with a very large market; parts of regulatory and institutional structures encourage an inward-looking view (use of Japanese law and Japanese language for transactions).
- Internationalization indicators:
  - Japan has 60 foreign banks compared to 146 (out of 155) in Hong Kong SAR and 117 (out of 122) in Singapore.
  - In 2013, Japan slipped from third place in forex markets to Singapore.
  - Equity and bond markets in Japan remain very large but predominantly host domestic issuers.

### Competition or complementarity between Hong Kong SAR and Singapore
- Geographic specialization:
  - Hong Kong SAR often referred to as the “gateway” to China; concentrates on markets in China, Taiwan POC, South Korea.
  - Singapore is the regional financial center for Southeast Asia; clients mainly from India and Southeast Asia.
- Product/market specialization:
  - Complementary product expertise across the two IFCs.
  - Aside from foreign exchange trading and fund management, limited competition exists in areas such as derivatives and offshore lending.
  - Derivative markets: Hong Kong SAR and Singapore offer different derivative products.
  - Offshore lending: distinct geographical distribution of their respective offshore lending.

*Source: Excerpt from IMF working paper content unit _wp14119*

### 16.      Important foreign exchange markets. Both Hong Kong SAR and Singapore are

### _wp14119 - 16.      Important foreign exchange markets. Both Hong Kong SAR and Singapore are

### Foreign exchange markets
- Hong Kong SAR and Singapore are important foreign exchange markets despite not having major currencies of their own.
- Hong Kong SAR’s currency board with the U.S. dollar since October 1983 has promoted its currency’s use as a proxy for the US dollar in futures and option hedging.
- On a global scale, foreign exchange markets in both Singapore and Hong Kong SAR remain significantly smaller than those in the United Kingdom and the United States.

### Business lines and market size (selected statistics)
- Geographical distribution of forex market turnover (in percent) examples: 3.8, 4.1, 6.9, 5.7, 32.6, 40.9 (as displayed in source panel figures).
- Aggregate Assets Under Management (series shown for 1999–2011) indicate rapid growth in both jurisdictions.
- Equity market domestic capitalization: Singapore’s securities market grew from $34 billion in 1990 to $770 billion in 2013.
- Hong Kong SAR stock market capitalization: $3 trillion as of November 2013.
- Number of listed companies in Hong Kong SAR: 1,602 as of October 2013; market capitalization reported as HK$23.4 billion (as of October 2013 statement in source).
- Equity market shares: Hong Kong SAR and Singapore account for 4.8 percent and 1.2 percent of the world aggregate equity market domestic capitalization, respectively; and 16.4 percent and 4.8 percent if compared to the equity market capitalization of Asian countries.

### Renminbi business (Hong Kong SAR and Singapore)
- Hong Kong SAR (2013 HKMA figures):
  - Renminbi trade settlement: RMB3,841 billion in 2013.
  - Stock of outstanding renminbi bonds: RMB310 billion at end-2013.
  - Total issue size of the renminbi sovereign bond market: RMB8 billion in 2010 and RMB23 billion in 2013.
  - Outstanding renminbi loans: RMB116 billion at end-2013.
  - Renminbi customer deposits and outstanding certificates of deposit issued by banks: RMB1,053 billion at end-2013.
- Hong Kong SAR has become the premier offshore hub for renminbi trading, settlement, financing and wealth management.
- Singapore developments:
  - ICBC Singapore appointed as Singapore’s Renminbi clearing bank in February 2013, catalysing growth in renminbi activities, particularly trade financing.
  - SWIFT press releases cited Singapore overtaking London as the top RMB offshore clearing centre after Hong Kong (April 2014) and ranking first outside China and Hong Kong in use of RMB for trade finance (October 2013).
  - SGX and HKEx signed an MOU in December 2013 to collaborate on new technology, regulation, and joint product development for yuan-denominated products (bonds, commodity, equity or currency-based).

### Bond markets
- Both Hong Kong SAR and Singapore are midsized international bond markets smaller than London, Luxembourg, the US, and Ireland despite large expansions since 1995 (fivefold expansion in Hong Kong SAR; tenfold expansion in Singapore).
- Issuance predominantly in local currencies: 67 percent in Hong Kong SAR; 77 percent in Singapore.
- Hong Kong SAR issuance composition: private sector debt dominates at 64 percent.
- Singapore issuance composition: government and private debt each account for about half of issuance (47 percent and 53 percent respectively).
- Singapore is one of the most international bond markets in Asia — over a quarter of total annual issuance from foreign entities, mainly supranational agencies, corporations, and financial institutions.
- Since 2005 Singapore has been part of several main benchmark bond indices (examples cited include Citigroup’s WGBI, HSBC Asian Local Bond Index and JP Morgan WGBI).

### Equity markets
- Hong Kong SAR SEHK capitalization is almost four times that of the Singapore Exchange (SGX).
- Half of companies listed in Hong Kong SAR come from Mainland China.
- Market capitalization and listing dynamics have been heavily influenced by Mainland Chinese issuers.

### Fund management and asset management hubs
- Assets under management have grown rapidly: almost six-fold in Singapore and four-fold in Hong Kong SAR since 1999.
- Two-thirds of the top 50 global fund management companies have a presence in Hong Kong SAR and Singapore.
- Hong Kong SAR hosts the largest number of fund managers and the largest pool of hedge fund assets ($87 billion for Hong Kong SAR against $63 billion in Singapore).
- Asset allocation: assets under management are predominantly invested overseas and broadly equally divided between stocks and bonds.
- Asian-Pacific markets are major destinations: accounting for 70 percent of assets for Singapore and 80 percent of assets for Hong Kong SAR.
- Singapore fund management: 80 percent of the assets managed by the 600 fund management firms in Singapore originate outside (in particular in Asia), and 86 percent of the assets are then invested elsewhere.

### Market infrastructure
- Hong Kong SAR: Central Moneymarkets Unit (CMU) is the debt and securities settlement system; interbank Hong Kong dollar payments use Real Time Gross Settlement (RTGS); OTC Clear established by HKEx to clear and settle OTC derivatives.
- Singapore: two central counterparties (CDP for equity and debt securities; SGX-DC for OTC and exchange traded derivatives); MAS Electronic Payment System (MEPS+) is the RTGS equivalent; SGX-DC has a link with the Chicago Mercantile Exchange (CME).

### Insurance sectors
- In Singapore the insurance sector (primarily life insurance) is the second largest component of financial sector assets after banks, with 6 percent of assets (48 percent of GDP versus 12.5 percent in Hong Kong SAR).
- Hong Kong SAR hosts 155 insurers, 73 of which are foreign.
- Singapore hosts more than 250 insurance players, of which over 90 percent are foreign.
- Reinsurance premiums (2012): Singapore US$3.2 billion; Hong Kong US$1.32 billion.
- Both markets are among the most open insurance centers in the world but remain smaller compared to Japan, China and South Korea.

### Untangling drivers of growth — methodology
- Constant market share method applied to foreign IPOs and bond issuances in IFCs:
  - Structural effect: change in the composition of foreign issuers (issuer mix).
  - Competitiveness effect: change in the IFC’s share of world IPOs or bonds holding issuer composition fixed.
- The approach follows analogous logic to trade-constant market share decompositions; full methodology referenced in appendix II (source).

### Untangling drivers of growth — findings
- General finding: competitiveness gains were the main driver of post-crisis growth in IPO issuance, while the structural effect was more important for international bond issuances.
- IPOs (selected quantitative findings):
  - Since 1998 the volume of international IPOs in Hong Kong SAR and Singapore increased significantly.
  - Hong Kong SAR’s growth benefited more from change in shares of foreign issuers: 232 percent (Hong Kong) versus 93 percent (Singapore) in relevant decomposition periods reported.
  - IPOs from China rose by more than six-fold in Hong Kong SAR, accounting for almost the entire share of international IPOs in Hong Kong SAR during 2003-2007.
  - Singapore’s gains included a large competitiveness contribution (718 percent) and substantial first-time issuances (784 percent) coming mostly from emerging Asian countries.
  - Post-crisis (2008–2012): Hong Kong SAR experienced a sharp decline in Chinese IPOs, which dropped by 26 percent; first-time issuances contributed about 15 percent to Hong Kong SAR’s growth, more than offsetting the negative structural shock; competitiveness effect for Hong Kong SAR in this period reported as 3 percent, indicating growth stemming from Hong Kong SAR’s own competitiveness rather than solely a “gateway-to-China” effect.
  - In Singapore, the mix of foreign issuers concentrated among emerging Asian countries contributed a negative 12 percent to growth relative to the world, while improvement in competitiveness more than offset this effect.

*Source: _wp14119 - 16.      Important foreign exchange markets. Both Hong Kong SAR and Singapore are (IMF working paper content provided).*

### 31.      Bonds (Pre-crisis). The  results from international bond markets offer a markedly

### Bonds (Pre-crisis) and Network Analysis of IFC Coexistence

### Bonds: pre-crisis and post-crisis international issuances
- Pre-crisis (comparison 1998-2002 to 2003-2007):
  - Singapore:
    - International bond issuances more than doubled, or by 44 percent relative to world growth.
    - Competitiveness effect contributed about 13 percent.
    - Structural effect contributed -22 percent.
    - Overall growth mainly driven by issuances from first-time issuers mostly from emerging Asian countries; locational advantage likely played a relatively larger role than gain in competitiveness.
  - Hong Kong SAR:
    - Experienced an 8 percent decline of issuances, or -76 percent relative to world growth.
    - Largely driven by a loss of competitiveness (-112 percent).
    - Negative impact mitigated by first-time issuances from a few Asian issuers and from the United Kingdom.

- Post-crisis:
  - Singapore:
    - Issuances increased by 134 percent.
    - About 65 percent of the increase can be attributed to the change in the composition of issuers towards Asian countries, notably China.
    - About 68 percent of the increase can be attributed to Singapore’s own gain in competitiveness.
  - Hong Kong SAR:
    - Growth of 261 percent.
    - Predominantly driven by the structural effect, in particular by fast growth in China-originated issuances that represented about 90 percent of total international issuances post-crisis.

### Network analysis: shock propagation model — mechanics and experiment design
- Model mechanics and assumptions:
  - Probabilistic shock propagation model based on a network of bilateral exposures between country pairs (stylized, hypothetical network).
  - Initial shock hits a country at random with likelihood proportional to interconnectedness.
  - Source country responds by cutting exposures (eliminating links to partner countries); larger exposures are more likely to be cut than smaller ones.
  - Deleveraging transmits shocks to partner countries, triggering further rounds of deleveraging.
  - Once a link is severed it cannot be re-established; each round is a “step”.
  - Steps have no intrinsic time dimension, but in practice could afford policy makers time to respond.
  - The experiment is repeated 1000 times.
  - Network is unweighted (all existing links assumed equal size) to keep the conceptual exercise simple; results interpret speed of contagion rather than size of impact.

- Stylized network structure:
  - Three regions: Asia (including Hong Kong SAR, Singapore, China, and eight other Asian countries), a global financial center linking Asia to the rest of the world (the UK or the US), and the rest of the world.
  - No explicit links between Hong Kong SAR and Singapore in the stylized network to capture geographical differentiation.

- Scenarios considered:
  1. Hong Kong SAR and Singapore remain specialized and complementary: Hong Kong SAR intermediates all exposures to China; Singapore intermediates exposures to the rest of Asia (stylized representation of current geographical complementarity).
  2. Hong Kong SAR and Singapore compete for the same business in Asia: both intermediate the rest of the world’s financial exposures to Asia.
  3. One center supplants the other (illustratively Hong Kong SAR becomes sole financial center in Asia).

### Shock propagation results and interpretation
- General findings:
  - Random shocks anywhere in the network:
    - If Hong Kong SAR and Singapore remain specialized (dotted red curve) or one shrinks (black curve), global shocks propagate more slowly than if both compete for the same markets and clienteles (blue curve).
    - Rationale: competing centers create overlapping exposures to the same partner countries, increasing probability that those partners receive shocks from either center.
  - Shocks originating in China:
    - A shock in China travels faster through a network with only one Asian financial center than with two specialized centers.
    - Singapore can act as a buffer between China and the rest of Asia, slowing contagion.
    - Either scenario with two specialized centers slows contagion more than two competing centers.
  - Capital account liberalization in China (China opens):
    - If Hong Kong SAR “blends” in to become the only financial center for China (or China develops its own center), the presence of Singapore as a separate specialized center increasingly stabilizes the financial network by providing a buffer between China (as source of shocks) and the rest of Asia.
    - The gap between shock propagation curves widens as China integrates into the global financial system, indicating a larger stabilizing contribution from Singapore in an open-China scenario.

- Conceptual interpretation limits:
  - Results speak to speed of contagion rather than magnitude of losses because links are modeled as severed rather than partially reduced.
  - The shock propagation curves are highly nonlinear because the network contains distinct regions; when shocks jump from Asia to the global financial center and then to the rest of the world they can infect a large number of countries suddenly.

### Policy-relevant implications from the shock propagation experiments
- The coexistence of Hong Kong SAR and Singapore as specialized, complementary financial centers may materially slow the propagation of shocks regionally and globally compared with scenarios of direct competition or single-center dominance.
- The stabilizing role of additional financial centers depends on their difference from existing centers; centers that serve as buffers between sources of shocks (e.g., China) and other countries increase network stability.
- As China opens its capital account and integrates into the global financial network, preserving geographic and functional complementarity between specialized centers (e.g., Hong Kong SAR and Singapore) becomes more important for regional and global financial stability.
- Excessive competition that increases overlapping exposures may engender destabilizing complexity and interconnectedness, potentially offsetting micro-efficiency gains from competition or economies of scale.

### Regulatory and supervisory issues: presence and business models of foreign financial institutions
- Role as gateways:
  - Hong Kong SAR and Singapore act as access points for the rest of Asia, offering expertise, infrastructure, diversified financial entities and services, and strong legal, regulatory and supervisory frameworks.
  - Strong presence of foreign banks, including global systemically important banks (G-SIBs), many incorporated as branches rather than subsidiaries.
  - Resulted in large cross-border exposures, especially to the US and UK, and banking system assets that are several multiples of GDP.

- Dominant bank business models in the two centers:
  - Two simplified dominant strategies:
    1. Deposit-led retail and commercial banking: banks collect local deposits first and then lend locally or regionally (stand-alone basis).
    2. Investment-led model: banks (typically branches of large foreign banks) fund projects primarily financed by the parent company or by funds raised in capital markets.
  - Examples:
    - HSBC, Standard Chartered Bank (SCB), and Citigroup have become strong local deposit-taking institutions in the region (similar to the first model).
    - Many European and American G-SIBs follow the investment-led model.

- Foreign G-SIB concentration and incorporation statuses:
  - Three foreign banks stand out in terms of size and importance for both Hong Kong SAR and Singapore: HSBC Group, SCB (United Kingdom), and Citigroup (United States).
  - In aggregate, these three hold 23 percent of bank assets in Singapore.
  - Together with Bank of China, they hold 53 percent of bank assets in Hong Kong SAR.
  - Operational specialization patterns:
    - Singapore often used as a platform for non-Japan–non-China Asia and for fixed income and asset management.
    - Hong Kong SAR used as a hub for China and Northeast Asia and for equities and investment banking.
  - Incorporation examples and supervisory implications:
    - HSBC is a Hong Kong SAR subsidiary with a branch in Singapore.
    - SCB is a subsidiary in Hong Kong SAR and incorporated a subsidiary in Singapore in October 2013 for retail banking while maintaining other operations under a branch.
    - Citibank has both a subsidiary and a branch in Singapore.
    - Incorporation status affects the extent of supervisory powers available to home and host authorities; capital regulations may not apply to branches in the same way as to subsidiaries, though many prudential risk management requirements (e.g., liquidity requirements) are applied across Authorized Institutions (AIs), subsidiaries and branches alike in both Hong Kong SAR and Singapore.
- Home/host supervisory responsibilities and cooperative arrangements often reflect proportionality considerations.

*Source: _wp14119 - 31. Bonds (Pre-crisis). The results from international bond markets offer a markedly different overall picture.*

### 46.      Connections  to  Mainland  China. In Hong  Kong  SAR,  Chinese  banks  market

### _wp14119 - 46.      Connections  to  Mainland  China. In Hong  Kong  SAR,  Chinese  banks  market

### Connections to Mainland China and presence of Chinese banks
- Chinese banks' market shares of total banking assets in Hong Kong SAR grew from 19 percent in 2009 to close to 29 percent in 2013.
- Many Chinese banks use their Hong Kong SAR operations to fund in US and Hong Kong dollars and to re-invest in China to finance local companies.
- The presence of Chinese banks in Singapore is very limited.

### Banking systems: scale, openness, and key statistics
- Hong Kong SAR and Singapore host large banking systems: 727 and 560 percent of GDP, respectively (in percent of GDP, 2012).
- Panel statistics (as presented in source charts) include:
  - Banking System Assets (in percent of GDP, 2012): United States 9%, United Kingdom 53%, Japan 9%, Switzerland 4%, France 4%, Other 21%.
  - Claims of foreign banking sector on Hong Kong SAR (in percent): United States 18%, United Kingdom 28%, Japan 14%, Switzerland 9%, France 6%, Other 25%.
  - Claims of foreign banking sector on Singapore (in percent): United States 89%, United Kingdom 6%, Japan 5%.
  - Hong Kong SAR: number of licensed banks composition: foreign branches 89%, foreign subsidiaries 6%, local banks 5%. Note: The largest four foreign banks account for one half of the banking system assets.
  - Singapore: number of commercial banks composition: foreign branches 95%, foreign subsidiaries 1%, local banks 4%. Note: Commercial banks account for 77.8% of the financial system assets. About half of the foreign banks offer retail services and accept retail deposits.
- Banking systems are very open to the UK and the US, partly due to the predominance of foreign banks (especially their branches).

### Importance of sound financial regulation in International Financial Centers (IFCs)
- Post-crisis shift in regulatory stance:
  - Tolerance for un-regulated products and markets has waned; well-regulated financial centers with sound prudential requirements and effective supervisory intervention may be considered safe havens.
  - A trend of greater convergence of regulation coexists with national fragmentation; sharp divergences may increase regulatory arbitrage risks and destabilizing competition.
- Both Hong Kong SAR and Singapore favor a strict, transparent regulatory approach and have a strong track record in timely adoption and strict implementation of the global regulatory agenda.

### Regulatory cooperation, priorities, and challenges
- Regional and global forum participation:
  - MAS and HKMA are members of BCBS and FSB and participate in regional fora including ASEAN Capital Market Forum, ASEAN+3 (CMIM, ABMI), and EMEAP.
  - Singapore hosts the IMF’s Training Institute for Asia and the CMIM’s independent surveillance unit, AMRO.
  - HKMA chaired the EMEAP Monetary and Financial Stability Committee and took the lead on implications of global financial reforms for Asia.
- Business model review and potential relocation of activities:
  - Structural measures (e.g., Volcker rule, UK “Vickers”, Liikanen proposals) may prompt banks to review business models, geographic footprints, and operational structures.
  - Some banks may consider moving assets to where funding is more readily available and cheaper, and booking/netting derivatives where underlying assets trade.
  - Asian IFCs could attract EU/US banks’ activities, especially in asset and private wealth management and possibly derivatives; robust regulation would be critical if complex assets migrate to Hong Kong SAR and Singapore.
- Challenges of hosting G-SIBs:
  - Size: G-SIB assets or revenues tied to Hong Kong SAR and Singapore may be small for the global group but meaningful relative to local banking assets, GDP, and reserves.
  - Interconnectedness: G-SIB failures could amplify systemic shocks; hosts need to monitor and guard against such vulnerabilities.
  - Complexity for supervision and resolution: Large foreign banks’ complex structures require joint surveillance between home and host authorities.
  - Systemic importance: Relative systemic value varies by perspective (home vs host). Examples: HSBC would likely be systemic for the U.K., Hong Kong SAR, and Singapore; Standard Chartered (SCB) is likely systemic for Hong Kong SAR and Singapore given elevated contributions to the bank’s revenues.
  - Leakages: Domestic regulations may not fully apply to foreign banks operating locally; the perimeter of application depends on form of incorporation (branch or subsidiary).
  - HKMA participates in 9 CMGs while MAS participates in 7 CMGs.

### Regulatory responses to foreign banks and hedge funds
- Foreign banks:
  - HKMA and MAS impose strict standards comparable to those on domestic banks regarding licensing and access to retail deposits, which may require local incorporation, and prudential requirements.
  - In Singapore, full and wholesale branches must observe a minimum asset maintenance ratio (AMR) of 35 and 15 percent respectively. A separate set of asset maintenance requirements under the Deposit Insurance Act covers insured deposits.
  - Foreign branches typically hold minimum liquidity assets equivalent to 16 percent of their qualifying liabilities and must maintain minimum cash balances.
  - MAS has resolution powers and can impose corrective/remedial actions on branches.
  - In Hong Kong SAR, existing liquidity requirements apply; the new LCR (for Category 1 banks) and Liquidity Maintenance Ratio (for Category 2 banks) will apply to foreign bank branches. A proposed new resolution regime would extend to branches of foreign banks; existing supervisory intervention powers extend to branches already.
- Hedge funds:
  - MAS requires asset and hedge fund managers operating in Singapore (including foreigners) to either hold a capital markets license or be registered.
  - Hong Kong SAR and the United Kingdom are tightening regulation and surveillance of hedge funds.

### Outlook and recommended supervisory approaches
- Hosting G-SIBs is an opportunity that calls for intensified supervision and cross-border cooperation.
- Active participation in foreign banks’ colleges of supervisors and crisis management groups (CMG) is essential to identify and develop robust, actionable resolution strategies for foreign G-SIBs active in Hong Kong SAR and Singapore.

### Summary, conclusions, and strategic recommendations
- Centrality: Hong Kong SAR and Singapore have increased in size and interconnectedness over the past decade and, based on WEO projections, are set to become even more interconnected.
- Complementarity: Network analysis suggests financial system stability is enhanced if Hong Kong SAR and Singapore exist as complementary financial centers across geographic clientele and asset markets; excessive competition could increase destabilizing complexity and interconnectedness.
- Credibility: To continue their stabilizing roles, both centers need to preserve sound financial systems via effective regulation, intensive supervision, and strong fiscal and external buffers, and foster collaboration on connectivity and infrastructure regulations.
- Expanding markets: Strategies include deepening markets, raising liquidity and tradability, broadening the investor base, and stepping up outreach and bilateral/multilateral cooperation.
- Financial infrastructure: Both jurisdictions seek to build multi-currency, multi-dimensional trading, investment, clearing, and processing platforms to be robust payment and settlement hubs connected to other IFCs.
- Strategic challenges:
  - Hong Kong SAR must balance servicing Mainland China’s financial needs and preserving its international character and policy autonomy.
  - Singapore, with a small domestic market dominated by the top three domestic banks, needs to develop long-term risk-based regional strategies and deepen its debt, stock, insurance, and asset management markets to attract foreign interest and innovation; Singapore is expected to remain a “safe haven” in South/South East Asia but may need to expand to new geographic and product growth drivers.
- Meeting regional needs: Hong Kong SAR and Singapore could boost financial integration in Asia, link Asia and niche regional centers to global financial centers, foster economic growth and financial resilience in Asia, and support the development of pan-Asian banking groups to mitigate volatility from US/EU-hosted groups and enhance Asia’s voice in global regulatory agendas.

### Appendix highlights
- Stylized scenarios for network roles:
  - Scenario 1: Hong Kong SAR is the financial center for China; Singapore is the financial center for the rest of Asia.
  - Scenario 2: Hong Kong SAR and Singapore are competing financial centers for Asia.
  - Scenario 3: Hong Kong SAR becomes the dominant financial center for China and the rest of Asia.
- Methodological note: The constant market share analysis specification used is similar to Amador and Cabral (2008), Jiminez and Martin (2010), and Munnik, Jacob, and Sze (2012), with an additional term to account for growth effects associated with “first-time issuers.”

*Source: IMF working paper content unit _wp14119 - pages excerpted on Connections to Mainland China, banking systems, regulation, and policy recommendations.*

### 62.      where

### _wp14119 - 62.      where

### Methodology and decomposition
- Variables and definitions:
  - denotes the volume of issuances in country k by issuers from country j during period t.
  - the growth rate of .
  - the share of issuances by issuers from country j in country k relative to the sum of all foreign IPOs in country k in period t-1.
  - the asterisk, *, denotes the world.
  - No “product” subscript is used since IPOs and bond issuances are considered separately and issuer nationality is the distinguishing dimension.
- Decomposition:
  - First term on the right-hand side captures the structural effect.
  - Second term captures the competitiveness effect.
  - A third term captures the growth effect associated with first-time issuances in the IFC by other countries in the sample (arising from many zeros in the data); its economic interpretation is ambiguous (could reflect proximity, competitiveness, or both).
- Mitigation of many-zeros problem:
  - Analysis also conducted using dataset aggregated into 3 five-year non-overlapping periods: 1998-2002, 2003-2007, and 2008-2012 to minimize the ambiguous first-issuer effect.

### Dataset
- Source: Dealogic (deal-level information on global IPOs and bond issuances).
- Definitions and scope:
  - International issuance (IPOs or bonds) = issuance by an issuer whose country of main business is different from the country of issuance.
  - Matrix of bilateral IPOs and bond issuances among 31 major economies for every year from 1998 to 2012.
  - IPOs: all IPOs taking place in sample countries were from the same set of countries.
  - Bonds: dataset accounts for about 85 percent of all international bonds issued in these 31 sample countries (i.e. 15 percent of international bond issuances in these countries were from countries outside the sample).
- List of sample countries (as given):
  - (11 Asian countries) Hong Kong SAR, Singapore, China, Japan, India, Korea, Malaysia, Taiwan Province of China, Indonesia, Thailand, Philippines
  - (2 North American countries) United States, Canada
  - (12 European countries) United Kingdom, Germany, France, Italy, Spain, Netherlands, Switzerland, Sweden, Luxembourg, Ireland, Russia, Poland
  - (2 Latin American countries) Brazil, Mexico
  - (2 Middle-east countries) Saudi Arabia, United Arab Emirates, and South Africa and Australia

### IPO findings (1998-2012; decomposition highlights)
- Aggregate change 1998-2002 to 2003-2007:
  - Hong Kong SAR: international IPO volume jumped by 424 percent.
  - Singapore: international IPO volume jumped by 1,565 percent (from a relatively small base of US$ 470 million).
- Drivers and shares:
  - Hong Kong SAR’s growth supported relatively more by change in shares of foreign issuers: 232 percent.
  - Singapore’s change in foreign-issuer shares: 93 percent.
  - Singapore’s competitiveness contribution: 718 percent.
  - Singapore’s contribution from first-time issuers: 784 percent.
  - IPOs from China in Hong Kong SAR rose from about US$ 20 billion in 1998-2002 to US$ 122 billion in 2003-2007 (more than six-fold), accounting for almost the entire international IPOs in Hong Kong SAR during 2003-2007.
- Post-crisis period 2008-2012:
  - Hong Kong SAR experienced a decline in Chinese IPOs to US$ 89 billion, a drop of 26 percent from 2003-2007.
  - Large first-time issuances contributed about 15 percent to Hong Kong SAR’s growth in 2008-2012, more than offsetting the negative structural shock.
  - Examples of large first-time IPOs in Hong Kong SAR in 2011: Glencore (Switzerland, US$ 10 billion), Prada (Italy, US$ 2.5 billion), Samsonite (United States, US$ 1.3 billion).
  - Hong Kong SAR’s competitiveness effect in post-crisis period: 3 percent.
  - Singapore: mix of foreign issuers among emerging Asian countries had a negative contribution of 12 percent relative to the world in the post-crisis period; improvement in competitiveness more than offset this, leading to net growth of 38 percent.
- Comparative competitiveness:
  - Gains in competitiveness were the main driver of post-crisis IPO growth in Singapore and Hong Kong SAR.
  - New York and London lost competitiveness from the pre-crisis period; New York benefited from positive structural growth effect (12 percent) reflecting increases from neighbors such as Brazil (US$ 7.5 billion) and Mexico (US$ 4 billion).

### International bond markets findings (1998-2012; decomposition highlights)
- 1998-2002 to 2003-2007:
  - Singapore: international bond issuances more than doubled from about US$ 55 billion to US$ 115 billion, or by 44 percent relative to world growth.
    - Competitiveness effect contributed about 13 percent.
    - Structural effect: -22 percent.
    - First-time issuers contributed 55 percent (notably China US$ 5 billion, India US$ 12 billion, Thailand US$ 5 billion, Malaysia US$ 3 billion).
  - Hong Kong SAR: issuances declined from US$ 12 billion to US$ 11 billion, or -76 percent relative to world growth, largely driven by loss of competitiveness (-112 percent).
    - Mitigated by first-time issuances from Malaysia (US$ 1.8 billion), Thailand (US$ 0.3 billion), and the United Kingdom (US$ 1.4 billion).
- Post-crisis 2008-2012:
  - Singapore: issuances increased 134 percent from US$ 115 billion in 2003-2007 to US$ 273 billion in 2008-2012.
    - Of the 134 percent growth: about 65 percent attributed to change in composition of issuers toward Asian countries (notably China).
    - About 68 percent attributed to Singapore’s gain in competitiveness.
  - Hong Kong SAR: growth of 261 percent, predominantly driven by structural effect (234 percent).
    - China-originated issuances climbed from about US$ 8 billion in 2003-2007 to US$ 37 billion in 2008-2012, comprising about 90 percent of total international issuances during 2008-2012.
  - New York: relative growth of 91 percent during post-crisis period mainly reflected sustained increase in competitiveness (80 percent).
  - London: benefited relatively more from structural effect partly due to increased issuances from some European countries such as Switzerland and Sweden.

### Regulatory background for Hong Kong SAR and Singapore
- Basel III implementation and implications:
  - Hong Kong SAR and Singapore are two of the 11 jurisdictions that published a final set of Basel III regulations, effective since January 1, 2013.
  - Regulatory changes expected to advantage many banks with Asian home countries, including Hong Kong SAR and Singapore.
  - Asian banks typically enjoy superior capital and liquidity positions relative to foreign banks operating in the region.
  - Region less affected by banking structure proposals (e.g. Volcker, Vickers, Liikanen) because banks follow simpler retail and commercial banking models.
- Supervision structure differences:
  - Singapore: Monetary Authority of Singapore (MAS) centralizes supervisory powers over banking, insurance and securities industries.
  - Hong Kong SAR: supervision entrusted to several entities dedicated to specific financial sub-sectors; Office of the Commissioner of Insurance (OCI) supports the Insurance Authority (IA), with plans to set up an independent Insurance Authority in 2015.
- High supervisory standards:
  - FSSAs conclude overall compliance with supervisory standards was very elevated compared with other major financial centers.
  - Bank prudential requirements higher and implemented sooner than Basel III in Singapore.
  - Both jurisdictions perform well on strict regulatory framework, timely implementation, robust micro-prudential and macro-prudential frameworks.
- External assessments:
  - Economist Intelligence Unit (EIU) 2012 ranking: Singapore scored “5” (highest), Hong Kong SAR scored “4”.
  - Standard and Poor’s (S&P) BICRA: both Hong Kong SAR and Singapore given top ranking and belong to “group 2”; both score '3' on "economic risk" and respectively “1” (Singapore) and “2” (Hong Kong SAR) on "industry risk".
  - S&P view: regulations more conservative than international standards; regulatory coverage and reach are extensive; regulator is effective.
- Specific regulatory features and liquidity/capital requirements:
  - Singapore:
    - Applies stringent capital standards and faster implementation schedule starting in January 2013 (two years ahead of Basel's 2015 timeline).
    - Higher capital standards apply to all locally incorporated banks, reflecting substantial retail presence and systemic importance.
    - Imposes a minimum liquidity assets (MLA) requirement: foreign bank branches required to maintain a minimum amount of assets in safe and liquid assets denominated in Singapore dollar and domiciled in Singapore in proportion to liabilities held in Singapore.
  - Hong Kong SAR:
    - Applies a conservative approach to the numerator of capital ratios.
    - Regulatory reserves (RR) created to offset drop in general provisions linked to adoption of IFRS; RR moved out of Tier 1 and counted (subject to limitations) as Tier 2 capital since 2005.
    - All authorized institutions (including foreign bank branches) subject to a 25% minimum liquidity ratio requiring maintenance of a minimum amount of liquefiable assets to cover one-month qualifying liabilities.
    - Regulators generally require subsidiarization of foreign banks with significant retail banking activities.
  - Deposit Protection Schemes (DPS) in both jurisdictions are appropriately funded.

### How Hong Kong SAR and Singapore compare with Basel III / FSB requirements (table summary)
- Basel III / FSB minimum standards:
  - CET1: 4.5%
  - Tier 1: 6%
  - Total Capital (TC): 8%
- Hong Kong SAR:
  - Minimum standards: CET1 4.5%, Tier 1 6%, TC 8%.
  - SIFIs capital surcharge: 1%-2.5% (planned; consultation ongoing); currently virtually all banks have a Pillar 2 add-on.
  - Conservation Buffer: 2.5%
  - Countercyclical Buffer (CCB): 0% to 2.5%
  - LCR: >100%
  - NSFR: >100%
  - Leverage ratio: >3%
  - Implementation schedule: Minimum capital by 2015; LCR 01/2015; NSFR 01/2018; Leverage ratio 01/2018.
  - Scope: “Internationally active banks” (and/or banks significant to the Hong Kong SAR banking system).
- Singapore:
  - Minimum standards: CET1 4.5%, Tier 1 6%, TC 8%.
  - Singapore applies higher internal minimums: CET1 6.5%, Tier 1 8%, TC 10% for locally incorporated banks.
  - Conservation Buffer: 2.5%
  - Countercyclical Buffer: No upper limit yet; up to 2.5% (higher at MAS discretion).
  - SIFIs capital surcharge: Yes, under Pillar 1 for domestic SIFIs.
  - LCR: >100%
  - NSFR: >100%
  - Leverage ratio: 3% is tested; wait for Basel III calibration.
  - Implementation schedule: 2013 (TC) to 01/2015 for certain measures; LCR 01/2015; NSFR 01/2018; Leverage ratio 01/2018.
  - Scope: All reporting banks (standalone & group level); all internationally active banks.
- Notes:
  - Hong Kong SAR follows Basel's implementation timetable phasing in from January 2013; banks in Hong Kong SAR have generally already satisfied/exceeded Basel III minimum standards (e.g. CET1 > 4.5%, Tier 1 > 6%, Total capital > 8%).
  - MAS implemented certain capital requirements earlier (two years ahead).

*Source: IMF staff summary of provided text from _wp14119 - 62.      where*

### 76.      Domestic  SIBs.  No  global SIBs headquarters  are  located in Hong  Kong  SAR and

### Domestic SIBs. No global SIBs headquarters are located in Hong Kong SAR and Singapore, but both jurisdictions have the ability to intensify supervision of domestically important SIBs.

### Domestic SIB designations and capital framework
- Only three Japanese and two Chinese banks have been designated as globally systemic banks (G-SIBs) by the FSB.
- No global SIBs headquarters are located in Hong Kong SAR and Singapore.
- Singapore, Hong Kong SAR and Australia will all have the ability to rely on Pillar 2 to impose higher capital requirements, even if the latter will not be disclosed.
- Hong Kong SAR is consulting the industry to include higher loss absorbency requirements under the G-SIB and D-SIB frameworks, with a view to have these under Pillar 1.

### Macroprudential
- Strong macroprudential track record51: both jurisdictions have been very active in macroprudential policy.
- Since 2009, MAS introduced macroprudential measures to cool the real estate market, including:
  - lower LTV limits,
  - buyer’s and seller’s stamp duties,
  - caps on debt service to income ratio,
  - caps on loan tenures.
- HKMA measures in recent years to temper excess credit growth, particularly in real estate (stemming mostly from very low interest rates), include:
  - strict maximum loan-to-value (LTV) ratios based on the value of the properties (with even lower thresholds for foreigners whose income is not Hong Kong SAR based),
  - caps on debt servicing ratios (DSR),
  - a "regulatory reserve" requirement in addition to the IAS 39 collective impairment allowance (CIA).

### Resolution mechanisms
- Resolution powers:
  - MAS (and in some instances, the designated “minister-in-charge”52) and HKMA are both tasked with resolution powers.
  - For now, MAS enjoys a more complete resolution toolkit than HKMA.
  - The Financial Services and Treasury Bureau of the Hong Kong SAR Government (in conjunction with the HKMA, SFC and OCI) have proposed a resolution regime for the financial sector in January 2014, which will cover banks, securities and future companies, insurers and financial market infrastructure, and which will be in line with the Financial Stability Board principles.53

### Structural measures
- No structural measures have been adopted:
  - Neither Singapore nor Hong Kong SAR have expressed interest in adopting structural measures such as those contemplated by the Volcker rule, Vickers proposals and Liikanen report, at least for now.

*Source: _wp14119 - 76.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14119.pdf_