HKMA Revises Supervisory Policy Module on Capital Adequacy Regime

The changes incorporated in the revised Supervisory Policy Manual module are mainly to:

• Revise the guidance on the self-assessment of proposed capital instruments to be included within an authorized institution's capital base so as to align with the equivalent guidance in the Code of Practice "Resolution Planning - LAC Requirements" (LAC-1)
• Update the guidance in relation to capital buffer, revised securitization framework, sovereign concentration risk, leverage ratio, and interest rate risks in the banking book to reflect the current capital regime in Hong Kong (in terms of both legal framework and associated supervisory practices)
• Outline the plan of HKMA to implement the remaining BCBS capital standards, covering those in relation to the Basel III final reform package

Under the updated section on the implementation plan of HKMA, the policy manual states that the Banking (Capital) (Amendment) Rules 2020 will take effect on June 30, 2021 for implementation of the BCBS capital standards on the treatment of counterparty credit risk (CCR) exposures of banks—that is, the standardized approach for measuring CCR exposures (SA-CCR) and capital requirements for bank exposures to CCPs. In addition, the proposed amendments to the Banking Capital Rules for implementation of the BCBS standard on the capital requirements for banks’ equity investments in funds (EIF standard) are being prepared in consultation with the industry. The EIF standard clarified the existing capital treatment for equity investments in investment funds under Basel II by introducing enhancements to reflect directly the risks associated with a fund’s underlying investments and its leverage. The updated module also indicates that the implementation of the Basel III final package and the revised market risk framework has been deferred by one year to January 01, 2023 to provide additional operational capacity for banks and supervisors in addressing the impact of COVID-19 on the global banking system. HKMA will have regard to the revised implementation timeline in devising its implementation proposals for Hong Kong in consultation with the industry.

Keywords: Asia Pacific, Hong Kong, Banking, Supervisory Policy Manual, Capital Adequacy, Basel III, Banking Ordinance, Resolution Planning, IRRBB, Leverage Ratio, BCAR, COVID-19, Regulatory Capital, Securitization Framework, BCBS, HKMA