Following the deferral of the implementation of Basel III announced by the Group of Central Bank Governors and Heads of Supervision on 27 March 2020, the Basel Committee on Banking Supervision (BCBS) issued additional guidance to alleviate the impact of COVID-19 on the global banking system on 3 April 2020. In light of this, the Hong Kong Monetary Authority (HKMA) has published a circular, directed at authorized institutions (AIs), setting out the application of this guidance in the context of Hong Kong.
Clarification of the treatment of extraordinary support measures related to COVID-19
Governments and public authorities in numerous jurisdictions have introduced extraordinary support measures to alleviate the financial and economic impact of COVID-19, including guarantee programmes for bank loans and payment holidays offered by banks to borrowers. To ensure that AIs reflect the risk-reducing effect of these measures in calculating their regulatory capital requirements, the HKMA has provided technical clarifications covering the following points in the Annex to the circular:
- the risk-based capital treatment of loans subject to government guarantees that have been made in response to the COVID-19 outbreak;
- the capital treatment of loans subject to payment holidays initiated in response to the COVID-19 outbreak; and
- the application of the HKMA’s guidance on the reporting of rescheduled assets, overdue asset, and classified assets in relation to loans subject to payment holidays initiated in response to the COVID-19 outbreak.
Expected credit loss provisioning
The HKMA expects AIs to continue to apply relevant expected credit loss (ECL) frameworks for accounting purposes. The HKMA notes that, at present, there are high levels of uncertainty regarding the forward-looking information relevant to estimating ECL and the application of the HKFRS/IFRS 9 assessment of significant increases in credit risk, given the limited availability of reasonable and supportable information. Notwithstanding this, AIs are expected to exercise informed judgement and to use the flexibility inherent in HKFRS/IFRS 9, for example, to give due consideration to long-term economic trends in estimating ECL.
The HKMA expects ECL estimates to reflect the mitigating effect of the significant economic support and payment relief measures implemented by public authorities and the banking sector. The provision of relief measures to borrowers should not automatically result in exposures moving from a 12-month ECL to a lifetime ECL measurement.
Hong Kong has not adopted the BCBS transitional arrangements for the regulatory capital treatment of ECL accounting. Instead, the HKMA has reduced the regulatory reserve requirement by 50% (to read our previous blog post on this, please click here).
Margin requirements for non-centrally cleared OTC derivatives
Following the announcement made by the BCBS and the International Organization of Securities Commissions on 3 April 2020, the HKMA will defer the final two implementation phases of margin requirements for non-centrally cleared OTC derivatives by an additional year. The final implementation phase will therefore commence on 1 September 2022 (covered entities with an average aggregate notional amount (AANA) of non-centrally cleared OTC derivatives greater than HKD60 billion will be subject to the requirements). As an intermediate step, from 1 September 2021, covered entities with an AANA of non-centrally cleared OTC derivatives greater than HKD 375 billion will be subject to the requirements.