The Hong Kong Monetary Authority (HKMA) announced that the applicable jurisdictional countercyclical capital buffer (CCyB) ratio for Hong Kong remains unchanged at 1%. Although the latest indicative buffer guide, calculated based on data from the first quarter of 2022, signals a CCyB of 0%, uncertainties about global and domestic economic environment have remained high. Thus, HKMA decided to retain the CCyB at 1%. HKMA also published a study that aims to examine the effect of economy-wide environmental, social, and governance (ESG) performance on sovereign credit risk.
The study examines the impact of ESG factors on sovereign credit risk over time and across economies. It addressed four key questions covering impact of ESG performance on reduction of sovereign credit risk, impact of faster ESG debt market development on reduction of sovereign credit risk, inclusion of ESG factors in investment decision making by investors, and determination on whether the ESG effect on sovereign credit risk is homogeneous across advanced economies and emerging market economies. This assessment is expected to provide important insights for ESG-related policymaking in the medium to long term.
The results of the study show that investors have generally factored in ESG performance and the development of the ESG debt market when pricing sovereign credit risk in recent years, and that the impact of ESG is significant in both advanced economies and emerging market economies. However, the emerging market economies’ sovereign credit risk appeared to be less sensitive to the ESG debt market size due to the still-underdeveloped ESG markets. The study also shows some differences in the sensitivity of sovereign credit risk to the individual E, S, and G factors, depending on the stage of economic development. The study found that sovereign credit risk of the advanced economies is insensitive to their governance performance while that of the emerging market economies is insensitive to their environmental performance. The findings suggest that policymakers should continue to support ESG-related developments and foster stronger international cooperation to improve the environmental performance of emerging market economies—for example, technology transfer via foreign direct investment to mitigate carbon emission.
Keywords: Asia Pacific, Hong Kong, Banking, Basel, Regulatory Capital, CCyB, ESG, Climate Change Risk, Low Carbon Economy, Sovereign Credit Risk, HKMA
Previous ArticleBSP Updates Address Granular and Other Data Collections for Banks
The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.
The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.
As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.
The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.
The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.
The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.
The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.