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By Donny Kwok and Noah Sin
HONG KONG (Reuters) - Hong Kong's central bank cut rates and the level of capital buffers it requires financial institutions to hold to 1% from 2% of their risk-weighted assets on Monday, to help companies and lenders weather the impact of the coronavirus outbreak.
The authority said it could cut the buffer requirement to zero if needed. The countercyclical capital buffer is part of the Basel III regulatory capital framework and aims to build up additional capital during periods of excessive credit growth.
This capital can then be released when the credit cycle turns to absorb losses and enable the banking system to continue lending in the subsequent downturn.
The central bank's chief executive Eddie Yue told reporters the move was expected to release HK$500 billion ($64.3 billion) into the market and hoped this would support small and medium-sized firms.
He said local markets were functioning smoothly despite a large correction in stocks. The Hang Seng Index was down 4% on the day.
"The financial system in Hong Kong is highly resilient with strong buffers. The banking system is robust and well capitalised with ample liquidity," Yue said.
"We expect that the financial market will remain highly volatile."
Retailers and tourism firms are battling for survival as economic activity and visitor arrivals have come to a virtual standstill in recent weeks as the coronavirus outbeak hits an economy already struggling with its worst recession in a decade.
Earlier on Monday, the Hong Kong Monetary Authority cut its base rate charged through the overnight discount window to 0.86%, after the U.S. Federal Reserve delivered a rate cut. Hong Kong's monetary policy moves in lock-step with the United States as the city's currency is pegged to the greenback at a tight range of 7.75-7.85 per dollar.
Rules stipulate that the base rate is set at either 50 basis points above the Fed's or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates (HIBOR), whichever is higher.
Yue said domestic money market rates were elevated because of recent bourse listing activity.
"When this funding demand eases, we expect the Hong Kong dollar interest rate will likely follow the downward trend of the U.S. interest rate," Yue said.
Commercial banks were yet to follow the central bank's signal, with HSBC leaving its best lending rate at 5% and Standard Chartered Bank also staying unchanged at 5.25% on Monday.
($1 = 7.7665 Hong Kong dollars)
(Additional reporting by Alun John; Writing by Marius Zaharia; Editing by Jacqueline Wong)