Having the appropriate set of resolution powers is a necessary, but not in itself a sufficient, condition for orderly resolution. Financial institutions need to be ‘resolvable’, which means that they need to be organised in such a way that it is feasible and credible for the resolution authorities to resolve them in an ‘orderly manner’, i.e. in a way that preserves the continuity of critical financial functions without significant adverse consequences for the financial system and the wider economy, and without exposing taxpayers to losses.
Under the Financial Institutions (Resolution) Ordinance (FIRO), the Monetary Authority (MA), as the resolution authority for banking sector entities which include all authorized institutions (AIs), may conduct resolution planning for individual AIs well in advance of any actual failure.
The Code of Practice chapter RA-2 "The HKMA's Approach to Resolution Planning" provides guidance on the MA's approach to resolution planning for AIs. Broadly speaking, resolution planning for an AI involves:
Through the resolution planning process, the MA may work with the relevant AI to implement any necessary changes to its legal structure, business operations and/or structure of financial resources necessary for enhancing resolvability so that its preferred resolution strategy can be implemented effectively if needed (see Resolution Standards page for the list of typical impediments to resolvability and the resolution standards which relevant AIs need to comply with in order to enhance resolvability).
In normal times, resolution planning is generally expected to be prioritised for any locally-incorporated AI with total consolidated assets of more than HK$150 billion as their non-viability would likely pose a risk to the stability and effective working of the financial system of Hong Kong, including to the continued provision of critical financial functions (see Code of Practice chapter LAC-1 “Resolution Planning - LAC requirements”).
Resolution planning, including resolvability assessments and the relevant actions, is an ongoing process that seeks to ensure that failure of an AI could be managed in an orderly manner in view of the AI’s evolving structure and operations.