HKMA Rules on Bank Exposure Limits to Take Effect From 1 July

Under the rules, authorised institutions are subject to a statutory limit of 25% of capital on financial exposure to any one person or group of related persons.

The HKMA (Hong Kong Monetary Authority) has announced that the Banking (Exposure Limits) Code was published in the gazette and will take effect from 1 July.

The BCBS (Basel Committee on Banking Supervision) framework for measuring and controlling large exposures, issued in April 2014, is designed to provide for the enhanced measurement of exposures in a manner which better reflects a bank’s economic loss when a counterparty defaults.

The HKMA’s set of rules to implement the 2014 BCBS large exposures standards and update other exposure limits have now completed the legislative process and will take effect on 1 July 2019.  Last July, the HKMA extended its implementation deadline by six months.

The Banking (Exposure Limits) Rules, or “BELR”, amend section 87 of the previous banking ordinance by more comprehensively capturing equity exposures and recognising commonly used risk mitigation techniques to measure equity exposure. They also provide details of the valuation of different types of equity exposure and change the basis of calculation for the equity exposure limit from overall capital base to Tier 1 capital.

Under the rules, all authorised institutions are subject to a statutory limit of 25 percent of its capital base on its financial exposure to any one person or group of related persons. Banks are expected to identify possible connected counterparties when the sum of all exposures to one individual counterparty exceeds 5 percent of Tier 1 capital. Exemptions are allowed such as for sovereign, central bank, interbank intraday exposures.

A tighter limit of 15 percent is applicable for exposures between banks that have been designated as G-SIBs (global systemically important banks).

Banks must report to the HKMA all exposures with values equal to or above 10 percent of the bank’s Tier 1 capital and the largest 20 exposures to counterparties irrespective of their size relative to the bank’s Tier 1 capital.

Primary provisions in the rules have a grace period of 6 months for compliance.

The rules are available here.

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