[July 17, 2025] "Bad-Debt Bank" Proposal in Hong Kong?

The news about a proposed "bad-debt bank" in Hong Kong originated from reports published by reputable financial news outlets on July 17, 2025. Specifically, sources like The Business Times, The Straits Times, Bloomberg, and The Edge Malaysia reported that some of Hong Kong’s major banks, including Hang Seng Bank and Bank of Communications, were in early-stage discussions with advisory firms about setting up a special vehicle to manage non-performing loans (NPLs). These discussions were spurred by a significant increase in soured loans, estimated at US$25 billion to US$32 billion, primarily tied to the struggling real estate sector, and specific cases like New World Development’s refinancing. The proposed entity was reportedly modeled after China’s distressed asset managers, aiming to help banks offload bad debts and recoup a portion of the loans. The reports cited sources familiar with the matter, who spoke anonymously due to the private nature of the discussions, and noted that the talks were preliminary with no clear indication of traction among banks or regulators

These articles highlighted the growing concern over Hong Kong’s non-performing loans, which reached a two-decade high of 2% of total loans by March 2025, according to Fitch Ratings estimates based on Hong Kong Monetary Authority (HKMA) figures. The real estate sector’s challenges, including a surge in office vacancies and a more than 50% drop in commercial property valuations, were cited as key drivers behind the discussions. The reports also mentioned a recent US$11 billion refinancing deal for New World Development as an example of efforts to avert deeper financial crises in the sector.

Is It Fake News?

The claim that Hong Kong banks were discussing the creation of a "bad-debt bank" does not appear to be fake news, as it was reported by multiple credible sources with consistent details. However, on the same day as these reports (July 17, 2025), the Hong Kong Monetary Authority (HKMA) issued statements denying any intention to set up a "bad bank" and affirmed that Hong Kong banks maintained healthy balance sheets. These statements were shared via posts on X by accounts such as @FirstSquawk, @LiveSquawk, @RedboxWire, @iNewsroom, and @MarketNews_Feed, emphasizing the HKMA’s position that no such plan was in place and that the banking sector’s asset quality was manageable.

The HKMA’s denial suggests that while discussions among banks may have occurred, as reported, there was no official or regulatory endorsement of the "bad bank" proposal. The HKMA further stated that banks’ provisions were sufficient and that the banking sector’s capital ratio (24.2% as of March 2025) and liquidity coverage ratio (182.5% for major banks) were well above international standards, indicating financial stability

How a "Bad Debt Bank" Works

A "bad debt bank," often referred to as an asset management company (AMC) or distressed asset vehicle, is a financial institution or special-purpose entity created to acquire, manage, and dispose of non-performing loans (NPLs) and other distressed assets from banks or financial institutions. The primary goal is to clean up the balance sheets of banks, allowing them to focus on core lending activities while mitigating systemic risks to the financial system. Here’s how it typically works:

1. Acquisition of Bad Assets: The bad debt bank purchases NPLs (loans where borrowers have defaulted or are unlikely to repay) from commercial banks, often at a discount reflecting the impaired value of the loans. This transfer removes toxic assets from the banks’ books, improving their financial health and regulatory ratios.
2. Funding Mechanism: Bad debt banks are typically funded through a combination of government backing, bond issuance, or capital from private investors. In some cases, the government may provide guarantees or subsidies to facilitate operations.
3. Asset Management and Recovery: The bad debt bank manages the distressed assets by restructuring loans, negotiating with borrowers, or selling the assets (e.g., underlying collateral like real estate) to recover as much value as possible. This may involve legal action, asset sales, or converting debt into equity.
4. Resolution and Disposal: The bad debt bank aims to resolve the NPLs over time, either by recovering funds through repayments or by selling the assets to third parties, such as private investors or distressed asset funds. The proceeds are used to repay creditors or investors.
5. Systemic Benefits: By removing bad loans from banks, the bad debt bank helps stabilize the financial system, restores lending capacity, and reduces the risk of broader economic fallout from widespread defaults.

Reference: The Straints Times, DotDotNews