Hong Kong: Digitalisation and the New Normal

In our last article, we noted a recent Banque de France bulletin which compared EU and US loss absorbing capacity (LAC) requirements.

Earlier this year Hong Kong's bank regulator, the Hong Kong Monetary Authority (HKMA) issued a report on the implementation of LAC requirements in Hong Kong. To ensure adequate LAC resources for resolution purposes, the HKMA introduced the Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements-Banking Sector) Rules (LAC Rules), which commenced operation on December 14, 2018. Over the past five years, the HKMA has been working with relevant authorized institutions (AIs), including all domestic systemically important AIs, to build up a layer of LAC resources as part of the resolution planning process. The report covered, among other things, the LAC positions of AIs, issuances and features of LAC debt instruments and approaches to ensuring compliance with the requirements under the LAC Rules.

Overall the report was positive finding that all domestic systemically important AIs had met their respective LAC requirements from January 1, 2023 and that the HKMA was extending such requirements to other locally incorporated AIs with total consolidated assets above HK$300 billion. In addition, one of these AIs issued the first non-capital LAC debt instrument to market investors in the Asia ex-Japan bond markets.

Furthermore the HKMA believes that banks need to accept that banking digitalisation is here to stay, and that this will significantly impact liquidity risk management. In particular, it expects banks to critically review their liquidity risk management practices and ensure that those practices continue to remain adequate in the "new normal." Such expectation includes banks satisfying themselves that their contingency funding arrangements will allow them to obtain sufficient liquidity at very short notice, including access to central bank liquidity support facilities.

In light of the events of 2023, the HKMA has also said that it expects AIs to dedicate greater efforts when monitoring social media and is of the view that this may become a very important liquidity risk management tool going forward. Whilst not expanding on details, the HKMA has already tried out some engines to predict whether certain keywords and the way those keywords are spreading could lead to potential problems. 

As for other developments, the HKMA has issued, following an earlier consultation, a new chapter of the Code of Practice issued under the Financial Institutions (Resolution) Ordinance. The chapter sets out the HKMA’s expectations in relation to the ex-ante capabilities and arrangements an AI should put in place to maintain, in a resolution scenario, the continuity of access to critical financial market infrastructure services. The chapter follows the Financial Stability Board’s guidance on the same issue in July 2017.

To address the risk of disorderly early termination of financial contracts in resolution, AIs have been working on meeting the HKMA requirements set out under the Financial Institutions (Resolution) (Contractual Recognition of Suspension of Termination Rights – Banking Sector) Rules (Stay Rules). The first initial period for compliance under the Stay Rules concluded on August 27, 2023, by which time the contractual recognition requirements for covered contracts entered into by a covered entity with an AI or a G-SIB should have been met. The requirements for any other covered contracts should have been met by February 27, 2024. The HKMA has been assessing the work by AIs for meeting the Stay Rules requirements.