HKMA has decided to lower the regulatory reserve requirement on locally incorporated authorized institutions by 50%, with immediate effect. HKMA has found that the need for locally incorporated authorized institutions to maintain a regulatory reserve on top of accounting provisions has diminished. Thus, HKMA has decided to lower the regulatory reserve requirement for authorized institutions to provide authorized institutions with a greater lending headroom to support customers to cope with the COVID-19 outbreak. The mechanism for determining the level of regulatory reserve reduction for individual authorized institutions and the consequential adjustment to the target rate for the calculation of the benchmark regulatory provision is set out in the Annex to the recent HKMA circular.
At the time of implementation of Hong Kong Financial Reporting Standard (HKFRS) 9 in January 2018, HKMA considered it prudent to continue requiring locally incorporated authorized institutions to maintain a regulatory reserve on top of accounting provisions. This decision was made taking into consideration that potential gaps might exist, at least initially, regarding the data, systems and controls required in determining expected credit loss provisions under HKFRS 9.
With HKFRS 9 having been implemented for more than two years, HKMA observes that locally incorporated authorized institutions have made good progress in enhancing their expected loss provisioning models, systems, and controls. The locally incorporated authorized institutions reported notable increases in their accounting provisions for the second half of 2019, given the deterioration in the economic environment. This indicates that the “expected loss” provisioning requirement under HKFRS 9 is robust and responsive to changes in external conditions. Accordingly, the need for locally incorporated authorized institutions to maintain a regulatory reserve on top of accounting provisions has diminished.
HKMA expects that the regulatory reserve release should not be used for dividend distribution, share buyback, or payment of bonus to senior management. HKMA will keep the situation under regular review and will continue to assess the implementation of HKFRS 9 by locally incorporated authorized institutions to see if any further adjustment to the regulatory reserve requirement is warranted in the future.
Keywords: Asia Pacific, Hong Kong, Banking, Accounting, COVID-19, HKFRS 9, ECL, Regulatory Capital, IFRS 9, HKMA
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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