HKMA Liquidity Regulatory Framework: Liquidity Coverage Ratio and Net Stable Funding Ratio

Hong Kong’s banking sector entered 2025 with a revised liquidity regulatory regime that tightens the calibration of two core metrics: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The Hong Kong Monetary Authority (HKMA) issued a circular on 28 June 2024, effective 1 January 2025, raising the minimum LCR requirement for all authorised institutions (AIs) from 100% to 110%. This change aligns Hong Kong with the Basel III finalisation timetable adopted by the Basel Committee on Banking Supervision in 2023. For compliance officers and licensed corporations that maintain banking relationships or hold deposits with AIs, the rule change has direct operational consequences. A higher LCR floor means banks must hold more high-quality liquid assets (HQLA) relative to their net cash outflows over a 30-day stress period. This compresses the pool of unencumbered assets available for repo transactions, securities lending, and intraday credit lines. The NSFR, which remains at the Basel minimum of 100%, now interacts with a more stringent LCR environment. Institutions that rely on short-term wholesale funding or maintain large derivative books face tighter liquidity constraints. This article sets out the current HKMA framework, the calculation methodology for both ratios, and the compliance obligations that AIs must meet under the Banking (Liquidity) Rules (Cap. 155 sub. leg. L).

Structural Framework of the HKMA Liquidity Regime

The HKMA enforces liquidity standards through the Banking (Liquidity) Rules, which came into full effect on 1 January 2015 and have been amended periodically since. The Rules apply to all AIs in Hong Kong, including licensed banks, restricted licence banks, and deposit-taking companies. The regime implements the Basel III liquidity standards with Hong Kong-specific modifications.

Legal basis and scope of application. Section 97M of the Banking Ordinance (Cap. 155) empowers the HKMA to prescribe liquidity requirements. The Banking (Liquidity) Rules (Cap. 155 sub. leg. L) set out the detailed calculation methods for LCR and NSFR. Rule 4 requires every AI to maintain an LCR of not less than 100% on a consolidated basis. Rule 5 imposes the same floor for NSFR. The HKMA circular of June 2024 raised the LCR minimum to 110% for all AIs, effective 1 January 2025. The NSFR minimum remains at 100%.

Supervisory approach and reporting frequency. AIs must report their LCR and NSFR figures to the HKMA on a monthly basis, within 15 business days of the end of each calendar month. The HKMA conducts on-site examinations and off-site surveillance to verify compliance. Non-compliance triggers a range of supervisory actions, from remedial plans to capital add-ons under the Supervisory Policy Manual module CA-G-5. The HKMA may also impose a higher individual minimum ratio on a specific AI if its risk profile warrants.

Interaction with other regulatory requirements. The liquidity regime operates alongside the capital adequacy framework under the Banking (Capital) Rules (Cap. 155 sub. leg. L). An AI that breaches the LCR minimum must notify the HKMA immediately and submit a remediation plan within five business days. The HKMA may restrict dividend distributions, bonus payments, or new business activities until compliance is restored.

Liquidity Coverage Ratio: Calculation and Compliance

The LCR measures whether an AI holds sufficient HQLA to survive a 30-day stress scenario. The ratio is defined as the stock of HQLA divided by total net cash outflows over the next 30 calendar days.

Step 1: Identify and value HQLA. HQLA must be unencumbered, liquid in markets during a crisis, and operationally capable of being monetised. The Banking (Liquidity) Rules divide HQLA into three tiers. Level 1 assets include cash, central bank reserves, and sovereign debt securities rated AA- or higher by at least two recognised credit rating agencies. Level 2A assets include sovereign debt rated A+ to A- and covered bonds rated AA- or higher. Level 2B assets include residential mortgage-backed securities (RMBS) rated AA or higher, corporate bonds rated BBB- or higher, and common equity shares in major stock indices. Level 1 assets have a 100% haircut factor. Level 2A assets have a 15% haircut. Level 2B assets have haircuts ranging from 25% to 50%. The total stock of Level 2 assets cannot exceed 40% of total HQLA. Level 2B assets cannot exceed 15% of total HQLA.

Step 2: Calculate total net cash outflows. Total net cash outflows equal total expected cash outflows minus total expected cash inflows, subject to a cap. Outflows are calculated by applying prescribed run-off rates to various liability categories. Retail deposits with stable relationships have a run-off rate of 5%. Less stable retail deposits have a 10% rate. Unsecured wholesale funding from non-financial corporates carries a 25% rate. Funding from financial institutions carries a 100% rate. Inflows are capped at 75% of total outflows, meaning an AI cannot rely on inflows to offset more than three-quarters of its outflows.

Step 3: Apply the 110% minimum. An AI must maintain an LCR of at least 110% as of 1 January 2025. The HKMA circular of 28 June 2024 stated that the increase from 100% to 110% reflects the finalisation of Basel III and the need for a “prudential buffer in the Hong Kong context”. AIs that fall below 110% must report to the HKMA within 24 hours and submit a plan to restore compliance within 10 business days.

Practical implications for AIs. The higher LCR floor reduces the amount of HQLA that can be used for other purposes, such as collateral for derivatives or securities financing transactions. AIs with large derivative books face particular pressure because derivative liabilities generate high outflow rates under the LCR calculation. The HKMA’s Supervisory Policy Manual module LM-1 provides guidance on how AIs should manage their liquidity buffers operationally, including procedures for monetising HQLA during stress events.

Net Stable Funding Ratio: Structural Liquidity Management

The NSFR complements the LCR by requiring AIs to maintain a stable funding profile over a one-year horizon. The ratio is defined as available stable funding (ASF) divided by required stable funding (RSF). The minimum is 100%.

Step 1: Calculate available stable funding. ASF is the portion of an AI’s capital and liabilities that is expected to remain stable over a one-year period. The Banking (Liquidity) Rules assign ASF factors to different liability categories. Tier 1 and Tier 2 capital receive a 100% ASF factor. Stable retail deposits with a residual maturity of one year or more receive a 95% factor. Less stable retail deposits receive a 90% factor. Wholesale funding from non-financial corporates with a maturity of one year or more receives a 100% factor. Wholesale funding with a maturity of less than one year receives a 50% factor. Funding from financial institutions with a maturity of less than six months receives a 0% factor.

Step 2: Calculate required stable funding. RSF is the amount of stable funding that an AI must hold against its assets and off-balance-sheet exposures. Assets that are less liquid or have longer maturities require more stable funding. Cash and central bank reserves have a 0% RSF factor. Short-term government securities with a maturity of less than one year have a 5% factor. Loans to non-financial corporates with a maturity of less than one year have a 50% factor. Residential mortgages with a maturity of one year or more have a 65% factor. Unencumbered Level 1 HQLA not used in the LCR calculation have a 5% factor. Off-balance-sheet commitments, such as undrawn credit facilities, have RSF factors ranging from 5% to 50%.

Step 3: Maintain the 100% minimum. The NSFR must equal or exceed 100% on a consolidated basis. The HKMA has not announced any increase to this minimum as of 2025. However, the HKMA’s 2024 annual report noted that it “keeps the calibration of the NSFR under review” and may adjust the ratio in line with international developments.

Interaction between LCR and NSFR. The two ratios address different time horizons. The LCR covers a 30-day stress period. The NSFR covers a one-year structural horizon. An AI can be compliant with one ratio but not the other. For example, an AI that holds large amounts of short-term wholesale funding may have a strong LCR because those funds are stable over 30 days, but a weak NSFR because the funding is not stable over one year. The HKMA requires AIs to manage both ratios simultaneously and to report any divergence to the supervisory team.

Reporting, Enforcement, and Practical Compliance Steps

The HKMA has a structured framework for monitoring and enforcing liquidity compliance.

Monthly reporting requirements. Each AI must submit Form MA(BS)8L (LCR) and Form MA(BS)8N (NSFR) to the HKMA within 15 business days after the end of each calendar month. The forms require detailed breakdowns of HQLA by tier, outflow categories by counterparty type, and funding sources by maturity bucket. The HKMA may request additional information, such as stress test results or contingency funding plans, at any time.

Enforcement powers. Section 97S of the Banking Ordinance allows the HKMA to impose financial penalties for non-compliance with liquidity requirements. The maximum penalty is HK$5 million plus a daily penalty of HK$100,000 for continuing breaches. The HKMA may also issue a direction under section 97T requiring the AI to take specified remedial action. In practice, the HKMA has not publicly imposed monetary penalties for liquidity breaches as of early 2025, but it has issued supervisory letters requiring enhanced reporting and capital add-ons.

Practical compliance steps. Compliance officers should verify that their AI’s internal liquidity policies reflect the 110% LCR floor. Treasury teams should review the composition of the HQLA portfolio to ensure sufficient Level 1 assets are available. The 40% cap on Level 2 assets and the 15% cap on Level 2B assets must be monitored daily. For NSFR, the AI should assess whether any short-term wholesale funding exceeds the 50% ASF factor threshold and whether any long-term illiquid assets require additional stable funding. The HKMA’s Supervisory Policy Manual module LM-2 provides a template for contingency funding plans, which AIs should update annually.

Key Takeaways for Compliance Officers and AIs

1. The LCR minimum increased to 110% effective 1 January 2025, requiring AIs to hold an additional 10 percentage points of HQLA relative to net cash outflows.
2. The NSFR minimum remains at 100%, but the interaction with the higher LCR floor means AIs must carefully manage the allocation of HQLA between the two ratios.
3. Monthly reporting deadlines are strict — Form MA(BS)8L and Form MA(BS)8N must be submitted within 15 business days after each month-end.
4. Non-compliance triggers a 24-hour notification requirement to the HKMA, followed by a 10-business-day remediation plan.
5. The HKMA retains discretion to impose higher individual minimum ratios on AIs with elevated risk profiles, so proactive engagement with the supervisory team is advisable.

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