Basel II Compliance in Hong Kong

Hong Kong Monetary Authority (HKMA) officials today (Friday) spoke at a City University of Hong Kong seminar on Basel II Compliance attended by nearly 400 banking and finance professionals, students and faculty members.

The purpose of the seminar was to provide an update on implementation issues in relation to the Basel Committee on Banking Supervision's revised capital adequacy standards for banks ("Basel II"), focusing on the practical steps to be taken by authorized institutions to achieve compliance by the implementation date of 1 January 2007.

Speaking at the briefing, Mr Simon Topping, HKMA Executive Director (Banking Policy), noted that "Hong Kong will be in the initial wave of jurisdictions to introduce the new requirements, alongside other major international financial centres such as London, Paris, Frankfurt and Tokyo. Implementation can enhance institutions' reputation and standing and the stability and effective working of the banking sector."

Mr Topping stressed that the implementation approach has been developed in close collaboration with the industry, the emphasis being on cost-effectiveness and pragmatism. Referring to concerns that implementation could be costly, Mr Topping added that "Working together with the industry, we have developed a range of approaches so that there is an option that is suitable - and cost-effective - for every institution, from the smallest DTC to the largest internationally-active bank. And, to give added flexibility, we have made adoption of the advanced approaches, which may be more costly to implement, optional."

Commenting further on the cost/benefit issue, Mr Topping noted that "Much of the "cost" attributed to "Basel II compliance" is in fact necessary expenditure to upgrade risk management systems, which institutions would have been undertaking for business reasons even if there had been no Basel II."

Dr Michael Taylor, currently on secondment to the HKMA from the International Monetary Fund, followed Mr Topping's presentation with a presentation on internal ratings-based (IRB) systems. He highlighted the considerable potential benefits to institutions of developing such systems to help enhance their credit risk management. "There is considerable scope for institutions in Hong Kong to make greater use of internal ratings systems", he said. "Not every institution will want to become an IRB institution, but they should still be looking at making greater use of expert judgement systems and statistical modelling techniques."

Dr Taylor went on to outline the process that the HKMA will adopt for validating institutions' internal rating systems if they seek approval to use the IRB approach.

For further enquiries, please contact:
Kevin Ip, Manager (Press), at 2878 1687 or
Thomas Chan, Senior Manager (Press), at 2878 1480

Hong Kong Monetary Authority
17 March 2006