Beyond the basel accord: Should the capital adequacy ratio take account of the real estate environment in the Hong Kong Sar?

Abstract

The consolidated capital adequacy ratio, in accordance with the 1988 Basel Capital Accord, adopted for all banking institutions incorporated in the Hong Kong Special Administrative Region far exceeds international requirements. A new Capital Accord has been approved by the Basel Committee. It assigns a new risk rate of 35 percent to residential mortgages and the eight percent generally acceptable capital adequacy ratio will remain unchanged. As over 40 percent of loans held by local banking institutions are related to the real estate sector, the financial strength of these institutions could be affected by the performance of this sector. In fact, there are discrepancies between the capital adequacy ratios and qualifying credit ratings. This article examines these issues from a legal perspective.