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The following is issued on behalf of the Hong Kong Monetary Authority:
The Hong Kong Monetary Authority (HKMA) announced today (March 16) the designation of five authorized institutions as Designation of Domestic Systemically Important Authorized Institutions (D-SIBs). The list of D-SIBs is shown in Annex 1.
Each of the authorized institutions designated as a D-SIB will be required to include a Higher Loss Absorbency (HLA) requirement into the calculation of their regulatory capital buffers within a period of 12 months. In line with the phase-in arrangements in the frameworks issued by the Basel Committee on Banking Supervision (Basel Committee) for assessing D-SIBs and global systemically important banks (G-SIBs), the full amount of the HLA requirement will be phased-in from 2016 to 2019 in parallel with the Capital Conservation Buffer and Countercyclical Capital Buffer. Ultimately, the HLA requirement applicable to a D-SIB (which is expressed as a ratio of an authorized institution's Common Equity Tier 1 capital to its risk-weighted assets as calculated under the Banking (Capital) Rules) will range between 1% and 3.5% (depending on the assessed level of the D-SIB's systemic importance). However, under the phase-in provisions (set out in section 3V(2) of the Banking (Capital) Rules), the levels of HLA for 2016 will be within a range of 0.25% to 0.875%. The HLA for 2016 for each D-SIB is shown in Annex 1.
"The D-SIB framework is designed to complement the Basel III framework in promoting the effective working and stability of the banking system by enhancing the resilience of those banks deemed to be most significant to the local banking sector" the Monetary Authority, Mr Norman Chan said.
The HKMA intends to update the list of D-SIBs and their applicable HLA requirement annually.
Further details of the decision may be found in the Announcement of the designation of D-SIBs on the HKMA website. (www.hkma.gov.hk/eng/key-functions/banking-stability/sibs.shtml).
Background
1. D-SIB framework in Hong Kong
The Banking (Capital) Rules and the HKMA's regulatory framework for D-SIBs follow the provisions in "A framework for dealing with domestic systemically important banks" issued by the Basel Committee in October 2012, by enabling the Monetary Authority (i) to designate an authorized institution as a D-SIB if the Monetary Authority considers the authorized institution to be of systemic importance in the context of the Hong Kong banking and financial system and (ii) to require an authorized institution designated as a D-SIB to be subject to an additional HLA capital buffer.
The rationale for imposing an HLA requirement on D-SIBs is to reduce any probability of them becoming non-viable. This is considered both prudent and justified in view of the greater impact that they could have, in the unlikely event of their failure, on the domestic financial system and the local economy more broadly.
2. HLA requirement for authorized institutions designated as D-SIBs
The Monetary Authority is empowered under sections 3U and 3V of the Banking (Capital) Rules, which came into effect on January 1, 2015, to designate D-SIBs and to determine an HLA requirement for such D-SIBs by reference to the degree of domestic systemic importance which the Monetary Authority assesses them to bear. To achieve this aim, the HKMA's regulatory framework for D-SIBs provides for authorized institutions designated as D-SIBs to be allocated to different HLA "buckets". This differentiated approach reflects the diversified nature and varying degrees of systemic importance of authorized institutions in Hong Kong.
The designated D-SIBs must apply the HLA in the calculation of their regulatory capital buffers within 12 months of the notification of their designation. There are five HLA buckets in total ranging from 1% to 3.5%. Initially, only the first four buckets (i.e. 1%, 1.5%, 2% and 2.5%) will be populated, with an empty 3.5% bucket to deter D-SIBs from becoming even more systemically important. The HLA capital requirement will be phased-in from January 2016 to reach full implementation by January 2019. This means that the HLA applied to a D-SIB between 2016 and 2018 will only be a percentage of the full HLA capital requirement, and this percentage will increase by 25% each year. The phase-in ranges of the HLA requirement will be*:
HLA bucket 2016 2017 2018 ≥2019
5 0.875% 1.75% 2.625% 3.5%
4 0.625% 1.25% 1.875% 2.5%
3 0.5% 1% 1.5% 2%
2 0.375% 0.75% 1.125% 1.5%
1 0.25% 0.5% 0.75% 1%
The HLA applied to a D-SIB takes effect (together with the Countercyclical Capital Buffer) as an extension of the Basel III Capital Conservation Buffer. Accordingly, if and when a D-SIB's CET1 capital ratio falls within the extended buffer range, the D-SIB will be subject to restrictions on the discretionary distributions it may make. The effect of this is that D-SIBs will be required to retain earnings in order to bolster their regulatory capital.
*However, it does not necessarily follow that a D-SIB in a given HLA bucket will remain in that bucket throughout the phase-in period, as there may be intervening changes in its perceived degree of systemic importance.
Ends/Monday, March 16, 2015
Issued at HKT 19:18
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