Hong Kong regulator develops new rules over Basel III

The Hong Kong Monetary Authority (HKMA) is developing new rules for the implementation of Basel III this year and will also revise a number of supervisory modules to accommodate the resulting changes. As far as operational risk capital requirements are concerned, the regulator has said that it would wait for final standards to be issued by the Basel Committee before developing its own policy proposals and consulting the industry on this issue. It added that it will also issue guidance and disclosure templates this year so as to allow banks to file compliant disclosures under Basel's pillar 3 framework.

Hong Kong's banking regulator is developing new rules for the implementation of Basel III this year and will revise many supervisory modules to accommodate the resulting changes.



In its annual report, the Hong Kong Monetary Authority ("HKMA") said it would consult on new capital standards rules in the second quarter, finalise them by year-end and make them effective by 1 January 2017, in line with the Basel Committee timeline.



The proposed Banking (Capital) (Amendment) Rules 2016 will incorporate the Basel capital standards on banks' counterparty credit risk exposure and equity investments in funds, taking into account comments from the industry during a consultation late last year, the HKMA said. It also said it would consult on policy proposals for the local implementation of a revised securitisation framework, following plans outlined by the Basel Committee last year.



Similarly, following publication of the Basel Committee's final standards on minimum capital requirements for market risk in January this year, the HKMA said it would consult in due course on its implementation in Hong Kong. It said local implementation would likely be in 2019, in line with the Basel Committee timetable.



In the field of operational risk capital requirements, the regulator said it would wait for final standards to be issued by the Basel Committee before developing its own policy proposals and consulting the industry on this issue. The Basel Committee issued a second consultation on a standardized measurement approach for operational risk capital in March this year.



The regulator also said it will also issue guidance and disclosure templates this year to allow banks to file compliant disclosures under Basel's pillar 3 framework for the 2016 financial year.



Supervisory Module Changes



The implementation in Hong Kong of the Liquidity Capital Ratio and the Liquidity Maintenance Ratio would necessitate changes to be made to two supervisory modules relating to liquidity risk management during 2016, the HKMA said.



"Moreover, under the Basel Committee's timeline, the Net Stable Funding Ratio ("NSFR"), which is the second of the two liquidity ratios specified in the Basel III standard, is scheduled to be implemented on 1 January 2018," the regulator noted. "The HKMA has been conducting quantitative impact studies on the NSFR and intends to consult the industry in 2016 on policy proposals for local implementation."



The HKMA will also issue a revised supervisory module on counterparty credit risk management for consultation during 2016, in order to bring the module's guidance in line with recent developments.



The module on corporate governance will also see an overhaul to bring it into line with international standards, the regulator said. In addition, it will also release new supervisory guidance for its expectations of external auditors and audit committees.



Further module updates can also be expected for the Pillar 2 supervisory review process, general risk management controls, internal audit and compliance functions and the validation of risk-rating systems under the IRB approach for credit risk, the HKMA said.



A new supervisory module for resolution planning would be issued for industry consultation in the first half of 2016, the HKMA said. The module would reflect local and international developments on recovery and resolution of failing banks, it said.



The prudential framework for banks will also see an update, due to the impending application of IFRS 9 to banks in Hong Kong, the HKMA said.



"Part of this work will include considering the need to make amendments to banking returns, loan classifications and inputs into the regulatory capital calculation," it said.



Fewer Inspections in 2015



The regulator performed 193 on-site examinations at banks during 2015, down from 216 the year before. The focus was primarily on banks' credit risk management and asset quality, due to the risk of an increase in non-performing loans. The HKMA increased the number of examinations on treasury-related activities, given the market uncertainty over monetary policies.



The remaining inspections covered issues relating to mainland China-related business, stress testing and liquidity risk management, as well as operational, technology and anti-money laundering risk management. In addition, the regulator performed 152 thematic off-site reviews, covering similar areas.



The HKMA also performed an additional 196 off-site reviews to assess banks' corporate governance, financial position and business operations. Supervisory attention focused on risk governance, capital planning, corporate sector credit and monitoring of implementation of Basel III standards.



Another 20 tripartite meetings were held with the senior managers and external auditors of banks, while 23 meetings were held with the full board or board-level committees of selected banks.



The HKMA ordered six banks to appoint external auditors to follow up on potentially material supervisory issues during 2015. Two of the reports covered AML/CFT controls and another two of the reports covered private banking business, while the remaining were related to securities-related activities and loans classification systems.