On 6 July 2017, the Hong Kong Monetary Authority (HKMA) issued a circular in respect of its Supervisory Policy Manual module RE-1 “Recovery Planning” (SPM RE-1). The circular provides certain categories of authorized banks in Hong Kong (AIs), in particular, overseas incorporated banks with branch operations in Hong Kong and Hong Kong incorporated small scale banks, with guidance on their recovery planning obligations under SPM RE-1.
The HKMA has already required other categories of AIs to prepare and submit their recovery plans via two separate “waves”. However, prior to the third “wave”, there had been no requirement for branch AIs or small scale Hong Kong incorporated AIs to prepare and submit recovery plans to the HKMA. Given the significant number of overseas banks who operate branches in Hong Kong, the guidance will be applicable to a large number of AIs.
The guidance set out in the circular to AIs covered by the third “wave” includes the following points:
- in most cases it will be necessary for branch AIs with significant Hong Kong operations to have a Hong Kong recovery plan, drawing on the group recovery plan, as appropriate. Branch AIs should discuss both group and Hong Kong recovery procedures with the HKMA;
- if a foreign banking group has both a Hong Kong subsidiary and branch carrying on banking business in Hong Kong, the HKMA’s preference is that one plan be produced covering both operations;
- for branch AIs, Hong Kong senior management should have a key role in the governance of Hong Kong recovery planning to ensure local factors are taken into account. Additionally, where a branch has significant Hong Kong operations, the branch’s governance body at the bank’s head office should be involved in the review and approval of the recovery plan;
- AIs should include a complete disposal or full sale as recovery options. The recovery plan should specify the conditions for execution and steps that would need to be taken to implement recovery options. For small scale Hong Kong incorporated AIs, the range of recovery options may be limited, particularly where an AI only has a few lines of business. Such AIs therefore need to consider a range of appropriate recovery options that they may effectively deploy; and
- AIs should notify the HKMA of the occurrence or expected occurrence of a trigger event indicating that the AI needs to / may need to implement the recovery options set out in its recovery plan. The HKMA also needs to be notified of the triggering of an AI’s recovery plan, where it relates directly or indirectly to the AI’s Hong Kong operations.
AIs covered by this third “wave” will be individually notified by the HKMA of the timing for submitting recovery plans and related information to the HKMA.
The circular provides overseas incorporated AIs and small scale Hong Kong incorporated AIs with helpful and practical guidance on the HKMA’s expectations for such AIs’ recovery plans. The guidance provided in the circular is also timely, noting that the Financial Institutions (Resolution) Ordinance (Cap. 628) came into effect on 7 July 2017.
A copy of the circular can be accessed here.