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Regulatory Framework

Supervisory Objective

The Banking Ordinance provides the legal framework for banking supervision in Hong Kong. Section 7(1) of the Ordinance provides that the principal function of the Monetary Authority is to "promote the general stability and effective working of the banking system".

Compliance with Basel Core Principles

The HKMA seeks to establish a regulatory framework in line with international standards, in particular those recommended by the Basel Committee on Banking Supervision. The objective is to devise a prudential supervisory system to help preserve the general stability and effective working of the banking system, while at the same time providing sufficient flexibility for authorized institutions to take commercial decisions.

Regulatory Requirements

Authorized institutions have to comply with the provisions of the Banking Ordinance which, among other things, require them to maintain adequate liquidity and capital adequacy, to submit periodic returns to the HKMA, to adhere to limitations on loans to any one customer or to directors and employees, and to seek approval for the appointment of directors and chief executives, and for controllers. Overseas banks which operate in branch form are not required to hold capital in Hong Kong and are thus not subject to capital ratio requirements or to capital-based limits on large exposures.

Supervisory Approach

The HKMA follows international practices as recommended by the Basel Committee on Banking Supervision to supervise authorized institutions.

The HKMA adopts a risk-based supervisory approach based on a policy of "continuous supervision", through on-site examinations, off-site reviews, prudential meetings, co-operation with external auditors and sharing information with other supervisors. This aims at detecting any problems at an early stage. The "CAMEL" rating system helps identify institutions whose weaknesses in financial condition, compliance with laws and regulations, and overall operating soundness require special supervisory attention.

On-site Examination

The HKMA periodically conducts on-site examinations of individual institutions. The coverage of an examination may range from an investigation of specific areas to a comprehensive review of an institution's operations. Thematic examinations of selected institutions allow the HKMA to benchmark the institutions' risk management practices on important business lines and major risk areas. On-site examinations provide a valuable opportunity to assess at first hand how an institution is managed and controlled.

Off-site Review and Prudential Meeting

As on-site examinations are periodic in nature, in order to achieve "continuous supervision," they are supplemented by on-going off-site analyses of the financial condition of individual institutions and the assessment of the quality of their management, including the policies and systems in managing risks. The scope of off-site reviews ranges from regular analysis of statistical returns, covering various aspects of the operations of authorized institutions, to an extensive annual review of the performance and financial position of individual institutions. Annual off-site reviews are usually followed by a prudential meeting with senior management. Frequent contacts are also made with individual institutions at various levels of management as specific issues arise.

Tripartite Meeting with External Auditors

Cooperation with both internal and external auditors of the authorized institutions is another important aspect of the supervisory process. Annual tripartite discussions are held with institutions and their external auditors, normally upon the completion of annual audits. Matters discussed typically include the annual audit, adequacy of provisions and compliance with prudential standards and the Banking Ordinance.

Loan Classification System

The HKMA adopts a loan classification system requiring authorized institutions to report their assets every quarter according to a standardised framework. Under the system, loans are classified as Pass, Special Mention, Substandard, Doubtful or Loss, with the latter three categories collectively regarded as "classified assets".

The loan classification system was designed to enhance the HKMA's understanding of the asset quality of individual institutions and to provide an overview of the asset quality of the banking industry as a whole. The system is supplemented by regular reporting on provisions set aside for each category of classified assets and for different sectors in Hong Kong.

Capital Adequacy

The capital adequacy framework for banking supervision in Hong Kong has closely followed the internationally accepted standards published by the Basel Committee on Banking Supervision.

Applicable to all locally incorporated authorized institutions, the current framework consists of (i) minimum capital adequacy ratios that an AI should maintain, (ii) a supervisory review process to set and review individual institution's minimum capital adequacy ratios requirements and (iii) a set of disclosure standards applicable to the institution's state of affairs, profit and loss and capital adequacy.

The current framework makes available a number of approaches for authorized institutions of different levels of sophistication to calculate their capital requirements. According to the Banking (Capital) Rules, the use of some of the approaches requires the prior approval of the Monetary Authority based on certain specified criteria. Authorized institutions are required to report their capital adequacy ratios based on the appropriate approaches every quarter.

Supervision of Liquidity

The authorized institutions are required to comply with statutory liquidity ratios. They are also required to develop effective frameworks for liquidity risk management under normal and stressed situations, cash flow management and contingency planning for liquidity crises.

The HKMA monitors the level and trends of authorized institutions' liquidity positions and their ability to withstand stress liquidity scenarios through reviewing the returns and management reports submitted by them.

Derivatives and Risk Management

The HKMA takes a proactive approach in the supervision of authorized institutions' derivatives activities, focusing on three areas:

  • controls - to ensure that authorized institutions have adequate internal control systems to manage the risks of their derivatives activities;
  • capital - to ensure that authorized institutions have adequate capital to support possible losses in their derivatives business; and
  • capability - to ensure that there is adequate expertise within the HKMA to develop risk management policies and to supervise authorized institutions' derivatives activities.

Financial Disclosure Standards

The HKMA aims to ensure that the standards of financial disclosures in Hong Kong remain in line with those required in other leading financial centres. The Banking (Disclosure) Rules takes into account the risk-based disclosures recommended by the Basel Committee on Banking Supervision, as well as the enhanced disclosures resulting from the adoption of International Accounting and Financial Reporting Standards in Hong Kong. They prescribe the minimum standards for public disclosure which the authorized institutions must make in respect of their profit and loss, state of affairs and capital adequacy ratio.

Annual and Interim Financial Disclosure by Locally Incorporated Authorized Institutions

Authorized institutions incorporated in Hong Kong (except for the smaller restricted licence banks and deposit-taking companies) are required to disclose certain financial information (both on an interim and annual basis) relating to their income statements and balance sheets.

Authorized institutions are also subject to different levels of annual disclosure requirements, both qualitative and quantitative, depending on their credit risk calculation approach under the HKMA's capital adequacy regime.

Half-yearly Financial Disclosure by Overseas Incorporated Authorized Institutions

The Banking (Disclosure) Rules contain minimum disclosure standards applicable to the larger overseas incorporated authorized institutions, requiring them to disclose selected key financial information every six months in line with the disclosure requirements applicable to locally incorporated institutions, covering size and performance of their operations in Hong Kong and the quality of their assets. Certain key financial information (such as capital, assets, loans and deposits) of the overseas institution as a whole are also required to be disclosed to help place the operation of the local branch within the context of the whole institution.

Collection of Financial Information

The Monetary Authority's powers to collect prudential data from authorized institutions on routine or ad hoc basis are provided by Section 63 of the Banking Ordinance. The same section of the Ordinance also empowers the Monetary Authority to require any holding company or subsidiary or sister company of an authorized institution to submit such information as may be required for the exercise of his functions under the Ordinance.

Submission of returns is normally made each month or quarter.

Here is a full list of returns and completion instructions:

MA(BS)1, 1A and 1B - Assets and Liabilities

MA(BS)1C - Profit and Loss Account

MA(BS)1D - Large Exposures

MA(BS)1E - Liquidity Position

MA(BS)1F (a) and (b) - Certificate of Compliance

MA(BS)1G - Maturity Profile

MA(BS)2 - External Liabilities and Claims

MA(BS)2A - Loans and Advances and Provisions

MA(BS)3 - Capital Adequacy Ratio

MA(BS)6 - Foreign Currency Position

MA(BS)9 - Cross-Border Claims

MA(BS)10 - Weekly Statement of Certain Assets and Liabilities

MA(BS)11 - Hong Kong Dollars Interbank Transactions

MA(BS)12 - Interest Rate Risk Exposures

MA(BS)12(i) - Interest Rate Risk Exposures (Supplementary Information)

MA(BS)13 - Mandatory Provident Fund Related Activities

MA(BS)14 - Securities Related Activities

MA(BS)15 - Insurance Related Activities

MA(BS)16 - Return of Renminbi (RMB) Business Activities

MA(BS)18 - Return on Selected Data for Liquidity Stress-testing

MA(BS)20 - Return of Mainland Activities

MA(BS)21 - Return of International Banking Statistics

MA(BS)22 - Return on Intraday Liquidity Position of an Authorized Institution

MA(BS)23 - Return on Liquidity Monitoring Tools

MA(BS)24 - Return of Information for Assessment of Systemically Important Authorized Institutions

MA(BS)25 - Quarterly Reporting on the Countercyclical Capital Buffer (CCyB)

Last revision date: 27 January 2017
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