62. Fourth, we shall seek to maintain the stability of our financial system. Despite the wild fluctuations in the international financial markets over the past year, Hong Kong’s financial markets managed to operate in an orderly manner, and financial institutions remained strong and sound. Banks’ capital adequacy ratios have been maintained well above international requirements, and liquidity ratios at relatively high levels.
63. But with the global economy facing ever-increasing downside risks, any deterioration in the European sovereign debt crisis will dampen market sentiment, which may set off massive repatriation of funds from emerging markets. Hong Kong can hardly be immune from the impact and may suffer from an outflow of funds from the Hong Kong dollar.
64. The Hong Kong Monetary Authority (HKMA) and other regulators have introduced a number of regulatory measures to enhance the resilience of the financial system. Such measures include strengthening banks’ credit and liquidity risk management, increasing the level of banks’ regulatory reserve, and introducing four rounds of prudential regulatory requirements on mortgage loans. The regulators will continue to ask banks, securities brokers and insurance companies to strengthen their risk management. The foreign currency reserves the HKMA accumulated from capital inflows two years ago will serve as a buffer against the risk of an abrupt reversal in capital flows, and help maintain the stability of the Hong Kong dollar exchange rate and avoid excessive interest rate volatility.
65. I shall work jointly with our regulators to keep a close watch on the development of the global financial markets. Where necessary, appropriate measures will be taken to ease any possible strain on Hong Kong’s financial system and maintain the stability of our monetary and overall financial system.