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    HKMA Consults on Policy Module on Capital Adequacy Regime for Banks

    December 18, 2019

    HKMA issued a consultation on the Supervisory Policy Manual module CA-G-1, which provides an overview of the capital adequacy regime for locally incorporated authorized institutions. The manual sets out HKMA policy on capital adequacy for authorized institutions incorporated in Hong Kong and provides an overview of the framework for the calculation of the capital adequacy ratio of these authorized institutions. In the proposed Policy Manual, HKMA also announced that the implementation of the standardized approach for measuring counterparty credit risk exposures (SA-CCR) and the standard on capital requirements for bank exposures to central counterparties (CCPs) is targeted at around the end of 2020, to more closely track the implementation schedules in other major jurisdictions.

    The HKMA policy on capital adequacy closely reflects the latest regulatory capital standards published by BCBS. From January 01, 2013, HKMA had commenced the implementation of Basel III capital standards in Hong Kong, in accordance with the transitional arrangements specified by BCBS. Sections 2 to 15 of the module present an overview of the capital standards under Basel III that are currently effective in Hong Kong while Section 16 of the module briefly outlines the key capital standards that are to be implemented in the near future. 

    Section 16 of the supervisory policy manual on capital adequacy regime states that proposed amendments to the Banking (Capital) Rules (BCR) are being prepared for the implementation of three sets of BCBS capital standards relating to the treatment of banks’ counterparty credit risk exposures and their equity investments in funds. These standards are:

    • SA-CCR standard—to replace the existing Current Exposure Method (CEM) for calculating the exposure amount of counterparty credit risk arising from derivative contracts, with enhancements to better reflect the effects of margining, the level of volatilities observed during recent stress periods, and the netting benefits.
    • Capital requirements for bank exposures to central counterparties (CCP standard)—to ensure that banks adequately capitalize their exposures to CCPs and that there are incentives for banks to mitigate counterparty credit risk through central clearing. The new standards replace the existing two methods for calculating the capital charge of default fund contributions made by banks to qualifying CCPs, with a new approach under which the SA-CCR, instead of the CEM, will be used to determine a qualifying CCP’s counterparty credit risk exposures to its clearing members.
    • Capital requirements for banks’ equity investments in funds (EIF standard)—to clarify the existing capital treatment for equity investments in investment funds under Basel II by introducing enhancements to reflect directly the risks.

    Subject to the required rule-drafting and legislative processes, the implementation of the SA-CCR and the CCP standard is targeted at around the end of 2020 to track more closely the implementation schedules in other major jurisdictions. For the EIF standard, the proposed amendments to the BCR are being prepared in consultation with the industry.


    Keywords: Asia Pacific, Hong Kong, Banking, Capital Adequacy, Capital Adequacy Ratio, Basel III, BCR, SA-CCR, CCP Exposures, Equity Investment in Funds, HKMA

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