Valuation in Resolution

The Financial Institutions (Resolution) Ordinance (Cap. 628) (“FIRO”) mandates valuations to inform certain key decisions under the FIRO across the resolution process.  These valuations comprise the pre-resolution valuations and the post-resolution valuation, as follows—

• Pre-resolution valuations: to support timely and appropriate decisions by the Monetary Authority (“MA”) in relation to the timing of resolution initiation and the choice of stabilization option(s) to resolve and stabilise a failing authorized institution (“AI”) for the purpose of achieving the resolution objectives
• Post-resolution valuation: to support the decision by an independent valuer appointed under the FIRO on the eligibility of a pre-resolution creditor or pre-resolution shareholder of an affected entity to a payment of compensation if they receive, as a result of the resolution of that entity, less favourable treatment than would have been the case had winding up of the entity commenced immediately before its resolution was initiated

As valuation in resolution (“VIR”) will inform the MA’s timely and appropriate actions in resolving an AI and thereby preserving financial stability, the inability of an AI to conduct timely and robust VIR is therefore an impediment to orderly resolution. To address this impediment, the MA expects an AI to put in place capabilities and arrangements for supporting timely and robust VIR (“VIR capabilities”).

Against this background, the MA has issued the Code of Practice chapter VIR-1 “The HKMA’s Approach to Valuation in Resolution” and chapter VIR-2 “Valuation in Resolution Capabilities” under the FIRO.  The chapter VIR-1 outlines the valuations required under the FIRO and sets out how the valuations are generally anticipated to be carried out, including the methodologies, process and output.  The chapter VIR-2 provides guidance on the capabilities and arrangements an AI should put in place to support timely and robust VIR, as well as the MA’s approach to implementation.