HKMA circular on the technical amendment to the capital treatment of securitizations of non-performing loans (NPLs) by banks confirmed that HKMA intends to implement the technical amendment and the Basel III final reform package, together, by their effective date of January 01, 2023. HKMA recommended that authorized institutions should familiarize themselves with the technical amendment and carefully consider any implication it may have on their business activities. BCBS had published this technical amendment to the capital treatment of securitizations of NPLs in November 2020.
While permitting banks to determine the risk-weights of NPL securitizations in accordance with the hierarchy of approaches in the existing securitization framework, the technical amendment allows banks using the internal ratings-based approach or the standardized approach of the existing securitization framework to apply a risk-weight of 100% to senior tranches of certain types of NPL securitizations. Risk-weights for other tranches determined under these two approaches must not be lower than 100%. Foundation internal ratings-based parameters are also not permitted to be used as inputs for risk-weight calculations. The technical amendment will not change the existing capital treatment of securitizations of performing assets.
Keywords: Asia Pacific, Hong Kong, Banking, Credit Risk, Securitization Framework, Regulatory Capital, Basel, NPLs, Standardized Approach, IRB Approach, BCBS, HKMA
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