HKMA is consulting on the revised Supervisory Policy Manual module CA-G-5 that sets out the HKMA approach to conducting the supervisory review process under Pillar 2. This review includes the criteria and standards used for evaluating the capital adequacy of an authorized institution and, where applicable, the effectiveness of the capital adequacy assessment process of an authorized institution, for determining its Pillar 2 capital requirement. The consultation closes on October 18, 2019.
The module CA-G-5 describes how the Pillar 2 framework will operate under the capital adequacy framework and is applicable to all locally incorporated authorized institutions. This module should be read in conjunction with the Banking (Capital) Rules and other supervisory guidelines, including the modules of the Supervisory Policy Manual, issued by HKMA that are relevant to the assessment of capital adequacy of authorized institutions. Annex A to the module CA-G-5 presents a list of the supervisory guidelines that are applicable to the assessment of the capital adequacy of authorized institutions under the supervisory review process. With the implementation of Basel III (including the requirements in respect of the Banking (Capital) Rules buffer level), this module had been updated to illustrate the following:
- Operation of Pillar 2 within the revised capital adequacy framework (including the positioning of the Pillar 2 capital requirement in the capital hierarchy)
- Approach to allocating the Pillar 2 capital requirement among the common equity tier 1 capital ratio, tier 1 capital ratio, and total capital ratio
- Differentiation of P2A and P2B capital and how the Banking (Capital) Rules buffer level is taken into account to address any overlap
"P2A” means the portion of the Pillar 2 capital requirement that reflects risks not captured, or not adequately captured, in Pillar 1 while “P2B” means the portion of the Pillar 2 capital requirement that provides a cushion of capital to bolster resilience in times of stress without reference to specific risks considered under P2A. HKMA has conducted the supervisory review on authorized institutions since January 01, 2007 as part of its risk-based supervisory process. The main purposes of the supervisory review process are to assess capital adequacy of authorized institutions and to determine if they should hold additional capital to cater for risks that are not covered, or not adequately covered, under Pillar 1. The scope and extent of applying the assessment standards and criteria under the supervisory review process are commensurate with the nature, size, and complexity of the business operations of individual authorized institutions. The basic elements of the supervisory review process are embedded in the supervisory framework of HKMA.
Comment Due Date: October 18, 2019
Keywords: Asia Pacific, Hong Kong, Banking, Supervisory Policy Manual, Pillar 2, Basel III, Capital Adequacy, Supervisory Review Process, Banking Capital Rules, HKMA
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