Guidelines & Circulars

Our Ref: G10/1/7C

2 February 2005

Mr He Guangbei
Chairman
The Hong Kong Association of Banks
525 Prince's Building
Chater Road
Central, Hong Kong

Dear Mr He,

Review on Impact of the New Hong Kong Accounting Standards on Authorised Institutions' Capital Base and Regulatory Reporting

In my letter of 14th December concerning provisioning policies, I promised to consult you once the HKMA had considered the implications of the new Hong Kong Accounting Standards on AIs capital base and regulatory reporting. We have now conducted an internal review of these issues and our initial conclusions on these issues are summarized in the attached note.

Our main conclusion is that a number of changes to the Completion Instructions of the regulatory returns are required to provide AIs with appropriate guidance in regulatory reporting under the new accounting framework. In addition, we also believe that a one-off survey is necessary to assess the materiality of the accounting changes from a regulatory reporting and capital perspective. Depending on the results of this survey we may request additional regular reports in future.

I should emphasise that these conclusions are an interim solution and will be subject to further review in the light of Basel II implementation and further guidance from the Basel Committee. In addition, only locally incorporated AIs and overseas-incorporated AIs whose head offices have chosen to adopt comparable standards from 2005 will be affected. For AIs which are yet to adopt such new standards, these proposals will not apply to them and they should continue to report on the original accounting basis until the relevant implementation date of the new accounting standards.

It is our intention to proceed with the changes, including compilation of the one-off survey form, for the returns from the position of end-March. Meanwhile, while we do not intend to collect the one-off survey form via STET system in view of the systems and resource implications, we will keep this under review if we conclude more regular reporting is necessary. I would be grateful if you would let us have the Association's comments by 16 February. We will then follow up by writing separately to the Chief Executives of all AIs to make them aware of these changes and recommendations.

Cash Rebates on Residential Mortgage Loans

Separately, a feature of current market conditions is that some banks are offering optional payment terms to homebuyers as part of their marketing strategy for residential mortgage lending. In some cases, homebuyers are offered a significant cash rebate on the loan amount. Generally speaking, the HKMA expects AIs to price their products on the basis that they will make a reasonable profit every year, and avoid imprudent pricing decisions that may have an impact on long-term financial stability. Notwithstanding the recent accounting changes our policy in this case remains that cash rebates are to be amortised within a period of no longer than 3 years.

I am writing in similar terms to the Deposit-taking Companies Association.

If you have any questions, please feel free to contact Ms Theresa Kwan at 2878-1093 or Mr Eric Wong at 2878-8279.

Yours sincerely,

Simon Topping
Executive Director (Banking Policy)

Encl.

Attachment 1 (MS Word file, 43KB)
Attachment 2 (MS Word file, 71KB)
Attachment 3 (MS Word file, 27KB)

c.c.

Hong Kong Institute of Certified Public Accountants