of interbank liquidity; (2) setting up a mechanism for the provision of short-term liquidity assistance; and (3) strengthening the institutional framework for monetary management (Chiu 7).
In order to prevent a run on the banking system, the government took control of one private commercial bank – the Hong Kong Shanghai Banking Corporation (HSBC). In order to manage interbank liquidity more effectively, the government basically implemented a cap on the amount of interbank liquidity the bank could create. This led to the passage of the Account Arrangements law that required the HSBC to operate a clearing account with the Exchange Fund, thus increasing its discretionary power.
Another increase in discretionary power for the Exchange Fund occurred in the early 1990s when the government created the Liquidity Adjustment Facility (LAF). According to Kasa (3), the LAF works like a discount window by “allowing banks to make late adjustments to their clearing accounts through repurchase agreements with the Exchange F
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