HKMA to Modify Timeline for Final Basel Reforms, Issues Other Updates

HKMA has proposed amendments to the timeline of final Basel reforms, along with certain adjustments to the policy proposals, with the consultation period for these proposals ending on November 04, 2022. HKMA also proposed amendments to the Banking (Capital) Rules for the implementation of the revised market risk and credit valuation adjustment (CVA) risk frameworks (Annexes 1 and 2), along with the related new Supervisory Policy Manual modules for market and CVA risk capital charges (Annexes 3 and 4); the comment period for this consultation ends on December 12, 2022. To seek comments for both these consultations, HKMA has issued letters to the Hong Kong Association of Banks (HKAB) and the DTC Association. To allow more time for the industry to prepare for the necessary system changes for the adoption and the regulatory data reporting required of the standards, the following amendments to the timeline are being proposed:

• The implementation date of the standards associated with credit risk, operational risk, the output floor, and the leverage ratio will be adjusted from July 01, 2023 to a date no earlier than January 01, 2024
• The new standards for market risk and CVA risk will, as previously communicated, take full effect on a date no earlier than January 01, 2024. However, the reporting-only period for these two standards will be shifted from July 01, 2023 to January 01, 2024. 

HKMA also proposed the following adjustments to its policy proposals to align more closely with the Basel requirements:

• For the output floor phase-in arrangement to follow more closely that of the package, having regard to the arrangements adopted by other major jurisdictions
• For the minimum LTV-based risk-weight of residential real estate exposures under the revised standardized approach to follow that of the package (that is, 20% instead of 25%).

Relatedly, having regard to this latest calibration and the target output floor level of 72.5% under the package (representing a discount of 27.5% of risk-weighted assets calculated under the revised standardized approach), HKMA considers that for authorized institutions approved to use the internal ratings-based (IRB) approach, a risk-weight floor of 15% (~72.5% of the minimum 20% risk-weight under the revised standardized approach) for this type of exposures would more appropriately reflect such calibration. Subject to the comments from the industry, HKMA intends to notify institutions using the IRB approach that the 15% risk-weight floor will apply to the relevant exposures.

Finally, HKMA has proposed amendments to the Banking (Disclosure) Rules (BDR) to reflect the new/revised disclosure requirements associated with the Basel III final reform package, along with the consequential amendments arising from the proposed amendments to the Banking (Capital) Rules for implementing the Basel III final reform package (BCAR 2023). The consultation on Pillar 3 disclosures is open until November 28, 2022 and the chapters of the Basel framework mentioned in the consultation document are the chapters that are to be effective on January 01, 2023.

Keywords: Hong Kong, Banking, Basel, Market Risk, CVA Risk, BCAR 2023, Supervisory Policy Manual, Credit Risk, Operational Risk, Leverage Ratio, Reporting, BCR, BCAR, Scameter, Lending, ESG, SGS Framework, HKMA, Asia Pacific, Fraud Detection, Output Floor, Regulatory Capital