HKMA Details Tougher Liquidity Risk Practices for Banks

The Hong Kong Monetary Authority has set out significantly tougher expectations for liquidity risk management, signalling a clear regulatory response to the banking turmoil experienced in the US and Europe in 2023.

In a circular issued on 7 January, the HKMA outlined a detailed set of “good practices” for authorised institutions (AIs), focusing on faster deposit run dynamics, operational readiness for stress events, and near real-time monitoring capabilities. The guidance reflects a growing recognition that digital banking and social media have fundamentally changed the speed at which liquidity crises can unfold.

Faster Runs, Harsher Assumptions

A central theme of the HKMA’s guidance is the need to model liquidity stress events that materialise far more quickly than in the past. According to the regulator, the growing digitalisation of banking services—combined with the amplifying effect of social media—can cause deposit outflows to escalate at unprecedented speed.

As Carmen Chu, Executive Director (Banking Supervision), noted, digital channels and online sentiment can dramatically increase both the scale and velocity of deposit withdrawals during periods of stress.

In response, many AIs have already strengthened their stress-testing frameworks, particularly over the first seven days of a liquidity shock. Notably, some institutions have introduced a dedicated “digital add-on” to their stress models, calibrated using customer behaviour data and supplemented with a prudent buffer to capture accelerated outflow risks.

The HKMA also highlighted good practice in:

• Analysing deposit concentration by individual names, geographies, and sectors

• Running targeted stress scenarios against concentrated exposures

• Applying higher outflow assumptions to the uninsured portion of deposits

Together, these measures reflect a more granular and realistic approach to liquidity risk in a digitally enabled banking environment.

Contingency Funding Must Be Operationally Certain

Beyond modelling, the HKMA placed strong emphasis on contingency planning and the ability to mobilise funding rapidly under stress.

AIs are expected to formalise funding arrangements with head offices or parent banks, with clear documentation covering:

• Minimum committed funding amounts

• Eligible currencies

• Transfer mechanisms and channels

The regulator stressed that such arrangements must be deployable with certainty during stressed conditions, rather than relying on informal or untested assumptions.

Importantly, the HKMA reiterated that corporate loans can be used as collateral for accessing its Contingent Term Facility (CTF). In a pointed reminder to banks, the HKMA advised institutions to avoid including contractual terms in corporate loans that could restrict:

• The assignment of rights, or

• The disclosure of loan-related information to the HKMA

To further support operational readiness, AIs are encouraged to include a “security over lender’s rights” clause in corporate loan documentation, explicitly enabling those assets to be pledged when tapping the CTF.

24/7 Liquidity Awareness Is No Longer Optional

Speed and visibility are now core supervisory expectations. The HKMA noted that some AIs have implemented systems capable of producing key balance-sheet metrics—such as deposit movements and levels of unencumbered assets—within less than an hour.

Institutions are also expected to:

• Maintain sufficient liquidity buffers to manage stress outside business hours

• Make effective use of the Faster Payment System Discount Window

• Ensure decision-makers can act quickly during nights, weekends, and holidays

This reflects a shift away from traditional, business-hours-centric liquidity management toward continuous readiness.

Social Media as a Liquidity Risk Signal

One of the more forward-leaning aspects of the guidance relates to social media monitoring. The HKMA observed that some AIs now deploy 24/7 tools using big-data analytics to track near real-time sentiment across social platforms.

These institutions are developing quantitative indicators—such as click-through rates, volume of negative mentions, and sentiment shifts—to supplement traditional liquidity monitoring. While still evolving, the approach recognises that reputational narratives can quickly translate into funding stress in a hyper-connected environment.

Stronger Oversight and Internal Assurance

The HKMA also expanded expectations around governance and assurance. Internal audit functions are expected to play a more active role in:

• Regularly verifying the availability and accuracy of collateral data

• Ensuring information needed for contingency funding can be produced at very short notice

AIs are now expected to comprehensively review and enhance their liquidity risk management frameworks, systems, and controls in line with these practices.

A Clear Regulatory Signal

Taken together, the HKMA’s guidance sends a clear message: liquidity risk is no longer a slow-burn problem. Digital banking, social media, and market interconnectedness have compressed timelines and raised the bar for preparedness.

For banks operating in Hong Kong, the direction of travel is unmistakable—more severe assumptions, tighter operational execution, continuous monitoring, and demonstrable readiness to withstand fast-moving shocks. Institutions that treat liquidity resilience as a living, operational discipline rather than a compliance exercise will be best positioned to meet supervisory expectations in this new environment.