In 2007, the soaring mortgage delinquencies and foreclosures in the United States triggered the sub-prime crisis and soon spread over the world. In this report, major causes of the sub-prime crisis and its impacts on Hong Kong’s economy will be examined. Different measures made by regulators and financial institutions to tackle this crisis will be discussed also. Lastly, evidence about the recovery of Hong Kong will be provided.
The sub-prime crisis
In 2007, the collapse of subprime mortgage-backed securities (MBSs) brought to a huge loss among mortgage lenders. Many large financial firms including New Centaury Financial Corporation and Lehman Brothers Holdings Incorporation declared bankruptcy, which resulted in a downturn in the global financial market and a series of chain reactions spreading over the world afterwards.
Impact of the sub-prime crisis on the Hong Kong financial institutions After the outbreak of the subprime crisis, the Hong Kong financial market shrank along with the global economic recession. The stock market in Hong Kong declined from recorded high of 31,000 in October 2007 to 20,700 in March 2008 (Diagram 1) as investors losses their confidence and withdrew money from the market.
Moreover, many banks wrote down huge amount of money for numerous sub-prime related securities. For example, HSBC wrote off US$17.284 billion for potential losses in MBS or MBS related investments (HSBC 2008). Bank of China (Hong Kong) also wrote down HK$550m subprime-linked assets (Liu 2008).
Lastly, there was a credit crunch due to the uncertainty about the amount of MBS related assets held by banks and insurance companies. As a result, many financial institutions reduced loans to each other and increased the interest rate because of high credit risk. Many new companies and corporations were unable to obtain fund to further develop and improve liquidity.
Measures undertaken by the regulators and financial institutions In order to...