Banks bear credit risk when granting loans to counterparties, and are exposed to the risk of loss in the event of the borrower's default.
In April 2014 the Basel Committee on Banking Supervision (Basel Committee) issued a “Supervisory framework for measuring and controlling large exposures” to supervise banks’ credit concentration risk, including enhanced measurement of exposures in a manner which better reflects a bank’s economic loss when a counterparty defaults.
The HKMA has made a set of Banking (Exposure Limits) Rules (Cap. 155S), which came into effect on 1 July 2019. The Rules aim to implement the 2014 BCBS large exposures standards and also update other exposure limits to keep pace with market developments and contemporary risk management techniques. Under the Rules, there is a grace period of six months for compliance with the single counterparty (or group of linked counterparties) and connected party exposures limits.
In brief, an Authorized Institution must not incur exposures to a counterparty or group of linked counterparties that exceed 25% of its Tier 1 capital.