Following earlier announcements, the Hong Kong Monetary Authority (HKMA) has issued a circular confirming that, with immediate effect, the regulatory reserve^[1] requirement for locally incorporated authorized institutions (AIs) will be reduced by 50%.  The reserves released by this move will provide AIs with additional lending capacity to support customers impacted by COVID-19.  Reserves released should not be used by AIs for dividend distribution, share buybacks or payment of bonuses to senior management.

The HKMA has expressed that the need for AIs to maintain regulatory reserves on top of accounting provisions has diminished, particularly given the notable rise in accounting provisions reported by AIs for the second half of 2019. The HKMA considers the provisioning for accounting purposes to be sufficiently robust, allowing them to now relax the regulatory reserve requirement.

For further information on the mechanism for determining the level of regulatory reserve reduction for individual AIs and the consequential adjustment to the target rate for the calculation of the benchmark regulatory provision, please refer to the Annex to the circular.

[1]Regulatory reserve is the portion of a bank’s retained earnings earmarked for the purpose of maintaining adequate provision for possible credit losses. The regulatory reserve requirement is on top of accounting provisions made pursuant to Hong Kong Financial Reporting Standard 9.