The Hong Kong Monetary Authority (HKMA) issued a new module on Systemically Important Banks (CA-B-2) (SIB Module) to its Supervisory Policy Manual on 18 February 2015. The SIB Module constitutes a statutory guideline under the Banking Ordinance and applies to all Authorised Institutions (AIs) whether locally incorporated or not.

The SIB Module follows policy frameworks published by the Basel Committee on Banking Supervision (Basel Committee) regarding the identification and regulation of domestic systemically important banks (D-SIBs) and global systemically important banks (G-SIBs) and reflects consultation by the HKMA with the Hong Kong Association of Banks and the DTC Association.

The HKMA is given power pursuant to the Banking Ordinance to assess and designate AIs as D-SIBs or G-SIBs, depending on the systemic importance of each AI. All licensed banks will automatically be within the scope of the HKMA’s regular D-SIB identification assessments. Restricted licence banks and deposit-taking companies may be brought within scope by the HKMA on a case-by-case basis. AIs incorporated in Hong Kong will be assessed on a consolidated basis and overseas-incorporated AIs on the position of their Hong Kong offices.

The purpose of the SIB Module is to reduce the potentially significant risks to the economy posed by AIs in the case that they cease to operate and the SIB Module sets outs the HKMA’s assessment framework. The focus is on the impact of failure rather than the risk of failure of D-SIBs.

Some key points of the SIB Module and the HKMA’s assessment approach include:

  • possible D-SIBs are assessed on size, interconnectedness, substitutability and complexity
  • G-SIBs will be required to report to the HKMA regularly on relevant G-SIB indicators
  • both D-SIBs and G-SIBs will be subject to more stringent supervision from the HKMA and required to make certain disclosures accordingly
  • D-SIBs and G-SIBs will be given priority in recovery and resolution planning
  • locally incorporated AIs will be subject to a Higher Loss Absorbency (HLA) capital buffer requirement based on each AI’s degree of systemic importance. The HLA requirement will be phased in from 1 January 2016 prior to the full HLA requirement effective 1 January 2019.
  • Hong Kong branches of overseas-incorporated banks will not be subject to the HLA requirements or formally designated as D-SIBs. However, where the HKMA considers that a branch is so systemically important as to be a Hong Kong D-SIB it may take a more intensive regulatory and supervisory approach which could ultimately extend to requiring the AI to operate its Hong Kong business thorough a locally-incorporated subsidiary rather than the branch.

For further information, the HKMA’s press release is available here.