The Hong Kong Monetary Authority (HKMA) today (17 January) launched a two-month public consultation on a set of proposed rules relating to loss-absorbing capacity requirements for authorized institutions under the Financial Institutions (Resolution) Ordinance (Cap. 628) (the Ordinance).
The Ordinance established a cross-sectoral resolution regime for financial institutions that is fully compliant with international standards. It confers on the Monetary Authority, as the resolution authority for the banking sector, statutory responsibilities and powers to enable it to manage any future failure of an authorized institution in an orderly manner that avoids disruption to financial stability and minimises the risk to public funds.
One of the key resolution tools under the Ordinance is the ability for the Monetary Authority as resolution authority to ‘bail-in’ certain liabilities of a failing authorized institution. This will allow for the institution to be restored to viability by imposing losses on shareholders and certain creditors, avoiding the need for any injection of public funds. However, in order to ensure that the bail-in power can be used effectively to support orderly resolution, authorized institutions need to have sufficient loss-absorbing capacity (LAC), i.e. liabilities that can be readily bailed in. In order to achieve this, the proposed rules seek to set out minimum LAC requirements for authorized institutions.
Mr Norman Chan, Chief Executive of the HKMA, said: “The bail-in power is a key aspect in the orderly resolution of a failing authorized institution. However, as bail-in only applies to certain types of liabilities, we must introduce rules to ensure that banks have enough loss-absorbing capacity for bail-in to be feasible. In other words, adequate LAC is a precondition to effective use of the bail-in power, and to protecting taxpayers’ money.”
The consultation launched today sets out detailed proposals on minimum LAC requirements for authorized institutions. The proposals are designed to be aligned with the international standards on loss-absorbing capacity set by the Financial Stability Board in its Total Loss-absorbing Capacity Term Sheet. In drawing up the proposed rules, the HKMA has taken these standards into account, and made reference to the approaches adopted in comparable overseas jurisdictions.
The consultation invites views from any interested parties, including industry, academia and the general public, on all aspects of those proposals, including on the scope of institutions that will be covered, calibration of minimum requirements, eligibility criteria for LAC instruments, restrictions on the sale and distribution of LAC instruments and safeguards.
Subject to the outcome of the public consultation, the intention is to introduce the rules as subsidiary legislation under the Ordinance into the Legislative Council for negative vetting later in 2018.
The Ordinance was enacted by the Legislative Council on 22 June 2016. The main provisions of the Ordinance came into operation on 7 July 2017.
The consultation paper can be downloaded from the HKMA’s website. Interested parties are invited to send their written comments by mail to Consultation on AI LAC Rules, Resolution Office, Hong Kong Monetary Authority, 55th Floor, Two International Finance Centre, 8 Finance Street, Central, Hong Kong, or by e-mail to email@example.com, to arrive on or before 16 March 2018.
Hong Kong Monetary Authority
17 January 2018