April 24, 2019

HKMA and the Securities and Futures Commission (SFC) recently conducted coordinated inspections of a bank within a Mainland-based banking group and a licensed corporation (LC) owned by a subsidiary (Group). The agencies found that the Group,which is one of the many Mainland-based groups operating banks, licensed corporations, and other affiliates in Hong Kong, had entered into a series of complex transactions, via a private fund and other entities, that give rise to a number of serious concerns. HKMA and SFC have, therefore, issued this circular to encourage all institutions that may have adopted similar financing arrangements involving subsidiaries or affiliates of licensed entities to review them urgently and take all necessary steps to address all untoward risks.

Both HKMA and SFC identified concerns about certain activities of the Group. Inspection by HKMA identified deficiencies in the bank’s lending practices. Therefore, HKMA states that banks should ensure that credit facilities granted to their subsidiaries and affiliated companies or those of their holding company are granted on an arm’s length basis and subject to a prudent credit assessment, which should be at least as stringent as that performed on unrelated companies. The assessment should include an evaluation of the borrowing company's ability to repay and how the facility is intended to be used.

HKMA states that banks should also ensure that there is an effective post-lending monitoring framework to identify and follow-up on any major adverse developments of a borrower. If the borrower is engaging in high-risk activities (in this case, a margin loan to finance high-risk investments) or activities that deviate from its normal scope of business, the bank should critically assess the risk implications, including whether and how such activities may affect the repayment ability of the borrower as well as the reputation of the bank. The bank should take appropriate risk mitigation measures to reduce the risks identified. HKMA will review the effectiveness of controls of banks as part of its ongoing supervisory work.

SFC also found that the Group’s subsidiary, via a separate subsidiary holding a money lender license, also had provided lending to other listed companies secured by collateral provided by major shareholders. Some borrowers had pledged a significant proportion of the listed companies’ total issued shares (up to 70%). These were illiquid stocks of doubtful quality. SFC wishes to remind all holding companies or controllers of LCs to prudently manage the overall group financial risks to ensure it has the ability to provide financial support to the LCs and to contain contagion risks to the LCs that may affect their financial integrity.

Earlier, in a circular in August 2018, SFC had also expressed concerns about arrangements that effectively provide margin financing in the guise of investments. In the August 2018 circular, SFC had warned against facilitating the setting up or operation of securities margin financing arrangements by unlicensed persons to circumvent regulatory requirements. HKMA and SFC will continue to enhance regulatory cooperation and are also closely coordinating with Mainland regulators to share information and observations derived from their supervisory work.

 

Keywords: Asia Pacific, Hong Kong, Banking, Securities, Credit Risk, Special Purpose Vehicle, Margin Financing Activities, SFC, HKMA

Related Articles
News

FSB to Evaluate Effects of Too-Big-To-Fail Reforms for Systemic Banks

FSB is seeking feedback as part of its evaluation of the effects of the too-big-to-fail reforms for banks.

May 23, 2019 WebPage Regulatory News
News

APRA Releases Minor Changes to Reporting Standards on SA-CCR for Banks

APRA released minor changes to the three reporting standards for the standardized approach for measuring counterparty credit risk exposures (SA-CCR).

May 22, 2019 WebPage Regulatory News
News

APRA on Industry Self-Assessments into Governance and Accountability

APRA released an information paper analyzing the self-assessments performed by 36 of the country’s largest banks, insurers, and superannuation licensees in response to the final report on the Prudential Inquiry into the Commonwealth Bank of Australia (CBA).

May 22, 2019 WebPage Regulatory News
News

PRA Consults on Maintenance of TMTP Under Solvency II

PRA published a consultation paper (CP11/19) that sets out its approach to update supervisory statement (SS6/16) on maintenance of the transitional measure on technical provisions (TMTP) under Solvency II.

May 22, 2019 WebPage Regulatory News
News

APRA Proposes to Amend Guidance on Residential Mortgage Lending

APRA is consulting on revisions to the prudential practice guide APG 223 on residential mortgage lending in Australia.

May 21, 2019 WebPage Regulatory News
News

IASB Proposes Improvements to IFRS 9 and IFRS 16

IASB published the exposure draft ED 2019/2 that proposes amendments to four IFRS standards, including IFRS 9 on Financial Instruments and IFRS 16 on Leases.

May 21, 2019 WebPage Regulatory News
News

Denis Beau of BDF on Supervisory Priorities for Climate-Change Risks

Denis Beau, the First Deputy Governor of BDF, delivered opening remarks at the BCBS-BSCEE-FSI High-level Meeting for Europe on banking supervision.

May 21, 2019 WebPage Regulatory News
News

ISDA CDM to be Deployed for UK Digital Regulatory Reporting Pilot

ISDA announced deployment of the ISDA Common Domain Model (ISDA CDM 2.0) to support the UK FCA, BoE, and participating financial institutions in testing phase two of the Digital Regulatory Reporting pilot for derivatives.

May 21, 2019 WebPage Regulatory News
News

MAS to Consolidate Regulation of Merchant Banks Under Banking Act

MAS published a consultation paper that proposes to consolidate the regulation of merchant banks under the Banking Act and to move merchant banks to a licensing regime under the MAS Act.

May 21, 2019 WebPage Regulatory News
News

ESAs Amend Technical Standards on Mapping of ECAIs Under CRR

ESAs published a second amendment to the implementing technical standards on the mapping of credit assessments of External Credit Assessment Institutions (ECAIs) for credit risk under the Capital Requirements Regulation (CRR).

May 20, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3118