HKMA Retains List of Designated D-SIBs Announced in December 2019

Under the D-SIB framework, each authorized institution designated as a D-SIB will be required to include a Higher Loss Absorbency requirement into the calculation of their regulatory capital buffers within a period of 12 months after the formal notification of its designation. The Higher Loss Absorbency requirement applicable to a D-SIB (expressed as a ratio of an authorized institution’s Common Equity Tier 1 capital to its risk-weighted assets as calculated under the Banking (Capital) Rules) ranges between 1.0% and 3.5%. There are five Higher Loss Absorbency buckets, though only the first four buckets (from 1% to 2.5%) have been populated so far and the 3.5% bucket is empty, encouraging D-SIBs to refrain from becoming even more systemically important.

The Banking (Capital) Rules and the HKMA regulatory framework for D-SIBs follow the provisions in “A framework for dealing with domestic systemically important banks” issued by the Basel Committee in October 2012. The legislation enables HKMA to designate an authorized institution as a D-SIB if HKMA considers the authorized institution to be of domestic systemic importance and to require an authorized institution designated as a D-SIB to be subject to an Higher Loss Absorbency capital buffer.  The Higher Loss Absorbency applied to a D-SIB serves (together with the Countercyclical Capital Buffer) as an extension of the Basel III Capital Conservation Buffer. Accordingly, if and when the common equity tier 1 capital ratio of a D-SIB falls within the extended buffer range, restrictions will be imposed on the discretionary distributions of the D-SIB. This results in D-SIBs being required to retain earnings to bolster their regulatory capital.

Keywords: Asia Pacific, Hong Kong, Banking, Basel Regulatory Capital, Systemic Risk, D-SIBs, HLA Requirement, HKMA