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Viewing cable 08HONGKONG1776, SKITTISH DEPOSITORS LINE UP OUTSIDE BANK OF EAST ASIA

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Reference ID Created Released Classification Origin
08HONGKONG1776 2008-09-24 11:22 2011-08-23 00:00 UNCLASSIFIED Consulate Hong Kong
VZCZCXRO0407
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #1776/01 2681122
ZNR UUUUU ZZH
R 241122Z SEP 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5870
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 02 HONG KONG 001776 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT:  SKITTISH DEPOSITORS LINE UP OUTSIDE BANK OF EAST ASIA 
BRANCHES 
 
REF: A. HONG KONG 1737; B. HONG KONG 1762 
 
 
1. Summary: A rumor from undetermined sources spread throughout Hong 
Kong on September 24 that two local retail banks have "excessive 
exposures" to Lehman Brothers-backed structured finance products. 
The rumor, which named only the Bank of East Asia (BEA), resulted in 
hundreds of local depositors lining up to withdraw their funds from 
BEA throughout the afternoon at BEA branches across the city.  These 
latest difficulties for BEA followed the bank's disclosure on 
September 18 that its earnings required restatement, due to 
"unauthorized manipulation" of its credit derivatives portfolio (ref 
A).  Senior HKG and BEA officials strongly denounced the rumors, and 
declared the bank's asset base and liquidity position fundamentally 
sound.  Hong Kong Monetary Authority (HKMA) Chief Executive Joseph 
Yam promised his organization's "full support" for BEA.  Meanwhile, 
Nomura International stated it will not assume the liabilities 
related to structured finance products arranged or sold by Lehman 
Brothers entities in Hong Kong; these include the highly 
controversial Lehman-arranged "minibonds" to be liquidated as part 
of Lehman's bankruptcy (ref B).  Disgruntled investor 
representatives met with HKMA officials and delivered formal 
complaints lodged by 660 individual minibond investors.  End 
summary. 
 
Background on BEA, Local Deposit Insurance Program 
--------------------------------------------- ----- 
 
2. As of June 30, 2008, BEA had total assets of USD 51 billion (HKD 
397 billion), with capital levels in excess of international 
standards.  BEA's self-described exposure to Lehman Brothers and AIG 
totals USD 54 million (HKD 423 million) and USD 6.4 million (HKD 50 
million), respectively.  If BEA's statements are true, loss reserves 
related to those exposure amounts would be material -- but not 
dangerous -- for the bank to absorb.  In addition, Hong Kong's 
depository institutions such as BEA remain somewhat shielded from 
customer panic by Hong Kong's deposit insurance program administered 
by the HKG.  Similar in form and purpose to the Federal Deposit 
Insurance Corporation (FDIC) in the United States, Hong Kong's 
retail bank insurance program protects an individual's deposits, 
albeit up to only USD 12.8 thousand (HKD 100 thousand).  The program 
was established after the Asian financial crisis of 1997-98.  Since 
inception, it has not been obligated to reimburse any depositors of 
a failed institution. 
 
Chronology of a Mini-Run 
------------------------ 
 
3. BEA branches on Hong Kong Island and in Kowloon faced an 
increasing volume of depositor withdrawals on September 24, as 
rumors intensified about the bank's financial health.  Lines soon 
formed on the streets outside the branches, despite a heavy local 
rainstorm.  Local staff of the Consulate General confirmed that the 
police showed up at several BEA branches to ensure maintenance of 
order, although the queued depositors appeared unagitated. 
 
4. In response to local depositors' reactions to the market rumors, 
the HKMA issued a statement in the early afternoon.  The HKMA said, 
"The rumors about Bank of East Asia's financial situation are 
groundless.  The Hong Kong banking system is safe, healthy and in 
good operating condition.  The local banks have sufficient capital 
and liquidity, and the quality of their assets is good."  The office 
of the Financial Secretary also issued a statement at 1500 HRS local 
time, stating that the Hong Kong banking system "is stable and 
healthy, with sufficient capital."  The statement also described the 
BEA rumors as "groundless." 
 
5. At 1530 HRS local time, Joseph Pang, Bank of East Asia's Deputy 
Chief Executive, held a press conference and reassured the public 
that BEA had "no troubles."  He said BEA would allow customers to 
withdraw their time deposits in advance of maturity, if they 
desired.  Pang said all branches of Bank of East Asia extended their 
working hours by half an hour on September 24, in order to "meet the 
demands of customers." 
 
6. In the HKG's latest response to the situation, HKMA Chief 
Executive Joseph Yam held a press conference at 1630 HRS local time. 
 Yam told reporters that BEA has no liquidity problem and has only 
"limited" exposure to Lehman and AIG.  He said the rumors "would 
sabotage confidence," and he called upon the people of Hong Kong to 
remain calm.  He said, "The equity ratio of BEA is over 14 percent, 
compared with the minimum requirement of 8 percent.  BEA's liquidity 
ratio is about 40 percent, greatly surpassing the minimum 
requirement of 25 percent.  Both BEA's asset quality and operation 
are fine."  Yam said he the HKMA would fully support BEA, including 
provision of liquidity to the bank, if necessary. 
 
 
HONG KONG 00001776  002 OF 002 
 
 
Nomura Rejects Support for Lehman-Issued "Minibonds" 
--------------------------------------------- ------- 
 
7. As purchaser of various Lehman Brothers assets and operations in 
Hong Kong, Nomura International told Apple Daily newspaper on 
September 24 that it will not assume Lehman's liabilities on 
structured finance products sold or arranged by Lehman in Hong Kong. 
 Nomura explicitly mentioned it will assume no obligations related 
to the approximately USD 1.6 billion of Lehman-arranged "minibonds" 
sold to retail investors here. 
 
Minibond Complaints Delivered to HKMA 
------------------------------------- 
 
8. A newly-elected Legco member from the Democratic Party (DP), Kam 
Nai-wai, joined 50 Lehman minibond holders in a September 23 meeting 
with HKMA officials.  The disgruntled investors handed over 
documents detailing 660 complaint cases involving HKD 686 million of 
Lehman-arranged minibonds.  A spokesman for Hong Kong's financial 
secretary told Apple Daily that the HKG was still reviewing the 
applicable regulatory mechanisms governing the packaging and sale of 
the minibonds.  The spokesman cautioned that this review process 
"would not help the minibond investors for the time being."  These 
latest steps followed a DP-organized gathering on September 22 of 
800 irate investors in Lehman-arranged minibonds. 
 
DONOVAN