Capital is vital to the operations of banks. Adequate capital helps enhance bank's financial strengths and provides additional buffers to ensure sufficient funds to handle daily operations in the event of an emergency.
Under Basel III, Capital adequacy ratio (CAR) is a collective term referring to:
The capital requirements applicable to authorized institutions (AIs) are provided mainly in the Banking (Capital) Rules (BCR) issued by the Monetary Authority under section 97C(1) of the Banking Ordinance (BO). Locally incorporated AIs are required to comply with the minimum CAR requirements applicable to them.
|Capital Adequacy Ratio||Not Lower than|
|Common Equity Tier 1 capital ratio (CET1) (the highest quality regulatory capital in terms of loss absorption)||4.5%|
|Tier 1 capital ratio||6%|
|Total capital ratio||8%|
Note: The above table shows the minimum CAR applicable to AIs effective from 2015. For details, please refer to the requirements set out in sections 3A and 3B of the BCR as well as section 97F of the BO.
The HKMA has issued a Supervisory Policy Manual (SPM) module CA-G-1 “Overview of Capital Adequacy Regime for Locally Incorporated Authorized Institutions” setting out its policy on capital adequacy for AIs and providing an overview of the framework for the calculation of CAR. AIs are also required to manage and calculate CAR according to the guidelines provided in some other SPMs as applicable.
On top of the three minimum capital ratios, locally incorporated AIs are required to maintain capital buffers, which include:
The capital buffers, which must be met by Common Equity Tier 1 capital, are intended to bolster resilience of the banking sector against adverse economic developments and, in the case of the higher loss absorbency buffer, to limit negative impacts posed by systemically important AIs if they become non-viable. If any of the capital buffers of an AI is lower than the level prescribed in the BCR, the institution will be subject to restrictions on its ability to make distributions so that it can restore the capital buffer to the desired level.