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Regulatory & Supervisory 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 International Regulatory Standards

The HKMA seeks to establish a regulatory framework in line with international standards, in particular those issued by the Basel Committee on Banking Supervision and the Financial Stability Board. The objective is to maintain a prudential supervisory system which underpins 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, to submit periodic returns to the HKMA, to adhere to limitations on exposures to any single customer (or group of customers) 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 international standard-setting bodies, such as 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 authorized institutions is another important aspect of the supervisory process. Annual tripartite meetings 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 closely follows the international standards published by the Basel Committee on Banking Supervision.

Applicable to all locally incorporated authorized institutions, the current framework consists of (i) a series of prescribed minimum capital adequacy ratios (namely, the Common Equity Tier 1 capital ratio, the Tier 1 capital ratio and the Total capital ratio) and capital buffers (the capital conservation buffer, the countercyclical capital buffer and, in the case of any institution designated by the Monetary Authority as a systemically important authorized institution, a higher loss absorbency buffer), (ii) a supervisory review process to set and review individual institution's minimum capital adequacy ratio requirements and (iii) a set of disclosure standards relating to the institution's state of affairs including its profit and loss and its financial resources (covering both capital resources and liquidity resources).

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.


The liquidity framework for banking supervision in Hong Kong also reflects the international standards published by the Basel Committee on Banking Supervision as part of its “Basel III” framework. According to the Banking (Liquidity) Rules authorized institutions designated as “category 1 institutions” are required to maintain a Liquidity Coverage Ratio (LCR) and a Net Stable Funding Ratio (NSFR) in line with the Basel III standard. Other institutions, as “category 2 institutions”, are required to maintain a local Liquidity Maintenance Ratio (LMR). Category 2 institutions designated as “category 2A institutions” are also required to maintain a local Core Funding Ratio (CFR). Authorized institutions are also required to have in place effective systems and controls for liquidity risk management under normal and stressed situations.

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.

Exposure Limits

The current provisions on exposure limits in Hong Kong are set out primarily in Part XV of the Banking Ordinance (e.g. limits on single counterparty exposure, connected party exposure and interest in land, etc) and the Banking (Exposure Limits) Rules (Cap. 155R) (contain limit on equity exposure). These provisions are supplemented by the Supervisory Policy Manual (SPM) module CR-G-8 on “Large Exposures and Risk Concentrations”. With a view to implementing the “Supervisory framework for measuring and controlling large exposures” issued by the Basel Committee on Banking Supervision locally and keeping pace with market developments and contemporary risk management techniques, a revised set of Banking (Exposure Limits) Rules (Cap. 155S) will be implemented from 1 July 2019 to replace the exposure limits in the Banking Ordinance and the current Banking (Exposure Limits) Rules. A grace period of 6 months starting from that date will be allowed for compliance with the primary provisions in the revised Rules.

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.

In line with the international commitment to strengthening surveillance and risk mitigation in respect of derivatives transactions, authorized institutions are required to report information in respect of specified types of over-the-counter (OTC) derivatives transaction to a trade repository operated by the HKMA and to clear specified types of OTC transaction through designated central counterparties. Starting from March 2017, authorized institutions are also required to exchange two-way margin (i.e. both collect and post margin) for derivatives transactions not cleared through a central counterparty and to adopt specified risk mitigation standards such as swift and robust trade confirmation and dispute resolution procedures.

Regulatory Disclosure Standards

The HKMA aims to ensure that the standards for regulatory disclosure in Hong Kong remain in line with those of other leading financial centres. The Banking (Disclosure) Rules take into account the latest disclosure standards released by the Basel Committee on Banking Supervision, which prescribe quarterly, semi-annual and annual disclosure of specified items, including in the form of standard templates and tables, in order to promote user-relevance and the consistency and comparability of regulatory disclosure among banks and across jurisdictions.

Collection of Financial Information

The Monetary Authority's powers to collect prudential data from authorized institutions on a 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 the Monetary Authority’s functions under the Ordinance.

Submission of returns is normally made each month or quarter.

Last revision date: 21 February 2019
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