HKMA Revises Policy Module on Systemically Important Banks

The SPM module CA-B-2 sets out the assessment methodology of HKMA for identifying systemically important authorized institutions in Hong Kong and for calibrating the level of any higher loss-absorbency capital requirements. The module also sets out other policy and supervisory measures to be applied to authorized institutions that are identified as being systemically important to address the risks they pose. According to the BCBS D-SIB framework, D-SIBs should be assessed in terms of the potential impact of their failure on the reference system. This can be interpreted as a “loss given default” concept rather than a “probability of default” concept. The D-SIB framework in Hong Kong aims to assess the degree to which authorized institutions are systemically important in a domestic context by reference to the financial system and domestic economy in Hong Kong. This means that the assessment focuses on addressing the externalities that the distress or failure of an authorized institution could generate at a local level. The D-SIB assessment is based on the four factors drawn from the BCBS D-SIB framework—size, interconnectedness, substitutability, and complexity. D-SIBs are identified using a two-step approach. The first step is to draw up a preliminary indicative list of D-SIBs based on the quantitative scores calculated using a set of factors or indicators. The second step involves the exercise of supervisory judgment that may serve as a complement to the quantitative assessment process—that is, to refine the preliminary indicative list by either removing or adding authorized institutions to the list.

Keywords: Asia Pacific, Hong Kong, Banking, Regulatory Capital, D-SIB, G-SIB, Supervisory Policy Manual, Banking Ordinance, Systemic Risk, Basel, BCBS, HKMA