The Hong Kong Monetary Authority is planning to call on the territory’s banks to take part in a sophisticated stress-testing scheme because of fears that some could be severely hit by a rise in interest rates.

Earlier this year, the HKMA conducted an extensive stress-testing exercise that modelled the impact of a sudden rise in interest rates – of more than 2 per cent – on individual banks, based on data derived from regulatory inspections.

In an interview with the FT, Simon Topping, the HKMA’s head of banking policy, refused to name the banks that would be hit hardest. However, senior officials of the HKMA – the Chinese territory’s central bank, have expressed concern over the wide range of test results.

“Whatever scenario you conduct, it won’t tell you that you will have massive bank failures,” said Mr Topping. “[But] in extreme scenarios, you might find that some banks could be making a loss, while others remain strong.”

A sharp rise in interest rates could affect banks that face a mismatch between funding and lending as well as big exposure to interest-rate sensitive sectors such as property. Concerns over banks’ health reflect the prospect of interest rate rises in the next few months.

Mr Topping said: “Because of a lack of lending over the past five years, banks have also built up big portfolios of securities. Many of them have not necessarily factored in the interest rate risk.”

Next month, the HKMA is planning to launch a consultation designed to persuade the industry to participate in regular stress-testing exercises that would help determine banks’ regulatory capital, as part of the new Basel II accord on banking regulation.

Mr Topping said the HKMA was the first Asian regulator to propose the use of sophisticated modelling and stress testing methods.

Under the Basel II rules, which will take effect in Hong Kong on January 1 2007, banks are required to demonstrate they can identify and manage so-called “Pillar II” risks, including interest rate, liquidity and reputation risks.

“We are trying to loosen the reins in terms of risk management techniques and modelling, but people will have to stay within certain parameters,” said Mr Topping. “We are trying to give banks more freedom to succeed – or not to succeed.”

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