HKMA has published a circular that sets out the regulatory and reporting treatment for loans that participating authorized institutions may grant to eligible borrowers under the 100% Personal Loan Guarantee Scheme. The Hong Kong government recently confirmed, to HKMA, its commitment to provide funding for this loan guarantee scheme, which is to be administered by the HKMC Insurance Limited (HKMCI). After drawdowns, the loans will be sold by the institutions to HKMCI without recourse.
A participating authorized institution is expected to check the eligibility of an applicant against the criteria specified under the 100% Personal Loan Guarantee Scheme. As the loan will be transferred without recourse by the participating institutions to HKMCI shortly after it is created, HKMA considers that the credit risk exposure of the institutions is minimal. Thus, the HKMA’s supervisory requirements on credit assessment and credit risk management set out in the Supervisory Policy Module, or SPM, CR-G-2 do not apply to loans covered by this scheme. This scheme is intended to provide support in context of the pandemic; therefore, authorized institutions are expected not to take any credit actions that may result in a tightening of existing credit to any of the borrowers, on knowledge of their application under this scheme. In the circular, HKMA has set out:
- Treatment under Banking (Exposure Limits) Rules (BELR). The amount so covered by the government commitment under this scheme should be deducted from an authorized institution’s exposures to HKMCI.
- Treatment under Banking (Capital) Rules (BCR). For the standardized (credit risk) approach (STC approach) and the basic approach (BSC approach), an authorized institution may risk-weight the exposure the exposure as an exposure guaranteed by the government. For the internal ratings-based approach, an authorized institution should seek the HKMA exemption approval under section 12(1) of the BCR and apply the STC approach for loans granted under the 100% Personal Loan Guarantee Scheme instead. HKMA will process the application expeditiously.
- Treatment under SPM CR-G-7 on collateral and guarantees. After considering the arrangements in relation to this scheme, applying the underlying principle of paragraph 3.2.4 of the module, HKMA would not consider it unreasonable for an authorized institution to regard the cover of the government commitment for this scheme as enabling the authorized institution to treat an exposure to the HKMCI under the Scheme as “secured” for risk management purposes.
- Reporting arrangements under Capital Adequacy Ratio return. Under the BSC approach, the receivables should be reported as “loans to or guaranteed by the sovereigns of Tier 1 countries” with a risk-weight of 0%. Under the STC approach, the receivables should be reported as “public sector entity exposures.”
- Reporting arrangements under the large exposures return. If exposure to HKMCI is reported in Parts I, II, and III of the return, any outstanding receivables from HKMCI under this loan guarantee scheme at quarter-end should be reported in the “Memorandum item: Deductions.” For Part IV of the return, any outstanding receivables from HKMCI under this scheme at quarter-end are treated as exempted exposures and should be reported as indirect exposures to the government.
- Reporting arrangements under other banking returns. Outstanding receivables as at the reporting dates should be reported as exposures to HKMCI, as necessary, in accordance with the completion instructions.
Keywords: Asia Pacific, Hong Kong, Banking, Credit Risk, Basel, BELR, BCR, Reporting, COVID-19, Regulatory Capital, Large Exposures, Loan Guarantee, HKMA
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