Hong Kong banks may need to lift deposit and interbank lending rates

No thanks to higher funding required for retail deposits.

As the highest funding is required for retail deposits, small to medium-sized Hong Kong banks may be prompted to lift deposit rates and push up interbank lending rates, OCBC Research reports.

When Hong Kong implemented the Net Stable Funding Ratio (NSFR) in early January, Hong Kong banks are required to report NSFR falling below 100% to Hong Kong Monetary Authority (HKMA).

HKMA also makes certain modifications to the NSFR to devise a stable or core funding ratio for application to category 2 institutions. These institutions should then be required to maintain a modified NSFR of not less than 75% on average in each calendar month.

According to OCBC Research, "As the coefficient for retail deposits is the highest among various types of funding, small to medium size banks may be prompted to lift deposit rates. Also, higher funding needs of small to medium size banks may also push up interbank lending rates."

"Therefore, the new rules are expected to have upward pressure on HIBOR," OCBC Research concluded.