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    HKMA Issues Guide for Climate Stress Test and Other Updates

    The Hong Kong Monetary Authority (HKMA) issued guidelines to authorized institutions for the second round of the climate risk stress test. The Authority is also seeking comments, until April 21, 2023, on proposed amendments to the Banking (Exposure Limits) Rules (BELR) and the Banking (Capital) Rules (BCR) for implementation of the Basel III final reform package and has proposed revised templates for the return of large exposures (MA(BS)28), with the comment period ending on June 12, 2023. Additionally, HKMA decided to maintain the countercyclical capital buffer (CCyB) ratio for Hong Kong at 1%; issued a report on AML Regetch Network Analytics; published the ninth issue of Regtech Adoption Practice Guide; extended the application period of the 80% Guarantee Product, the 90% Guarantee Product, and the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) from end-June 2023 to end-March 2024; and welcomed the decision made by the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB) on the acquisition of Credit Suisse AG by UBS AG.

    Guidelines for climate risk stress test. Drawing on the experience gained from the pilot climate risk stress test in 2021 and the industry’s feedback, the HKMA has enhanced the climate risk stress test framework with a view to obtaining a more comprehensive assessment of authorized institutions’ exposures to climate risks, as well as further strengthening their capabilities in managing them. In the second round of the climate risk stress test, HKMA has introduced a new 5-year scenario to assess the potential impacts on participating authorized institutions arising from simultaneous economic and climate-related shocks. The time span of this scenario aligns with those typically adopted by authorized institutions in their strategic planning. Apart from exposures highly vulnerable to climate-related shocks, exposures which are usually considered less susceptible to climate change will also be covered in the second round of the climate risk stress test. Participating authorized institutions are required to follow a specified approach in segmenting their exposures so as to generate a more consistent sectoral impact analysis. Finally, detailed reporting standards have been developed for each scenario which include an expanded set of metrics with sufficient granularity in terms of risk factors, business sectors and geographical locations to support supervisory analysis and comparison of results across authorized institutions. The second round of the climate risk stress test will be undertaken over an extended period spanning from June 2023 to June 2024 to harmonize with the cycle of the HKMA’s supervisor-driven stress testing program and reduce the reporting burden on participating authorized institutions.

    Consultation on Proposed Amendments to BELR and BCR. The key proposed amendments to the BELR relates to changes to Part 1—Preliminary, Part 2—Equity, Part 7—Single Counterparty and Group of Linked Counterparties, Part 8—Connected Party and Part 9—Repeal and Transitional and Savings Provisions of the Banking (Exposure Limits) Rules. The proposed amendments to Part 10 of the BCR (Calculation of Sovereign Concentration Risk) include repealing Divisions 3 and 4 of Part 10 of the BCR (which together prescribe the process of determining the amount of exposure with reference to the methodologies under Part 7 of the BELR), and instead adopt a simple approach by making a cross-reference directly to the end-product of such calculations, that is, the definition of ASC exposure in Part 7 of the BELR (with necessary modifications to ensure there is no policy or conceptual change to the existing BCR treatment). These proposed amendments will also help simplify significantly the structure and language of Part 10 of the BCR. The target implementation date for both sets of proposed amendments are aligned with the target implementation date of the credit risk parts of the concurrent proposed amendments to the BCR, that is, a date no earlier than January 01, 2024.

    Additionally, the proposed revisions to the templates for the return of large exposures (MA(BS)28) are aimed at implementing changes consequential to the proposed amendments to the BELR, addressing the recommendations of the International Monetary Fund in relation to the prudential reporting of related party transaction as set out in the report issued under its Financial Sector Assessment Program (June 2021), and enhancing supervisory monitoring of credit concentration risk of authorized institutions. The proposed revisions are expected to take effect at the end of the quarter during which the amended BELR will come into effect. These draft revised templates, together with the associated explanatory notes, would be useful in guiding the potential system developments of authorized institutions to capture the required data in their preparatory work towards implementing the revised reporting requirements of MA(BS)28.

    Additional regulatory updates from HKMA addressed the following key topics:

    • The Report on Network Analytics aims to promote the adoption of network analytics capability to strengthen the response of banks’ anti-money laundering (AML) systems to deception and other financial crimes. The report highlights the potential of combining intelligence-led analytical tools with rules-based monitoring systems, which will help banks to enhance anti-deception efforts in the prevention, detection and disruption of financial crime. It also shares the experiences of banks already using this capability, and provides practical insights and expert perspectives, guiding banks in their exploration and adoption of network analytics.
    • The ninth issue of the Regtech Adoption Practice Guide focuses on regtech solutions for customer data and privacy. These regtech solutions can help banks improve the effectiveness of their privacy compliance activities and boost customer trust amid the growing volume of customer data collected and processed. It offers advice on how banks can use these solutions to address the challenges across the customer data lifecycle, from data inventory to consent management, data processing, impact assessment, and incident response.
    • The e-HKD Pilot Program commenced in May 2023 and is expectd to pave the way for the possible implementation of a retail central bank digital currency (CBDC)—that is, an e-HKD, in the future. Under the Pilot Program, HKMA will conduct a series of pilots in close collaboration with various stakeholders to examine the use cases as well as implementation and design issues relating to e-HKD. Through this iterative process, the outcomes and insights gained from each pilot would help enrich the HKMA perspective and refine the HKMA approach to the possible implementation of e-HKD. However, HKMA is not yet at a point where a firm decision can be made to introduce e-HKD.

    Keywords: Asia Pacific, Hong Kong, Banking, Basel, Regulatory Capital, Reporting, CCyB, ESG, Climate Stress Test, Climate Change Risk, Scenario Analysis, BELR, BCR, Large Exposures, AML, Regtech, Regtech Adoption Practice Guide, SME Financing Guarantee Scheme, Credit Suisse, UBS, HKMA

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