Basel Implementation in Hong Kong Outlook 2020

In December 2017, seven years after the first issuance of the Basel III framework, the Basel Committee on Banking Supervision (the "BCBS") published the Basel III: Finalising post-crisis reforms paper. In recent years, the industry started to refer the final pieces of the reform as Basel IV.

The Hong Kong Monetary Authority (“HKMA”), as a member of the BCBS, has been proactively adopting the Basel standards in Hong Kong. Over the past years, we have seen many local consultations about and much progress in the implementation of the global framework. 2019 has certainly been no exception.

It is an opportune time now to reflect upon the progress that Hong Kong has made in 2019 to implement the Basel standards, and look forward towards developments in 2020.


Important developments in 2019

As summarised in the seventeenth progress report on adoption of the Basel regulatory framework (the "latest Basel progress report") published by the Basel Committee in October 2019, Hong Kong implemented three standards in 2019: total loss-absorbing capacity (“TLAC”) holdings, interest rate risk in the banking book ("IRRBB"), and large exposures.



TLAC Holdings

On 1 April 2019, the TLAC holding standards final rules, which are the implementation of the 2016 BCBS standard on TLAC holdings, came fully into force in Hong Kong.

In addition, the Return of Capital Adequacy Ratio (Form MA(BS)3) was revised and reporting of relevant items to reflect the new regulatory capital treatments on holdings of non-capital LAC liabilities commended on 30 June 2019. The HKMA also published the standard LAC disclosure templates in October 2019.

Large Exposures


On 1 July 2019, the Banking (Exposure Limits) Rules, which are the implementation of the 2014 BCBS standard on the Supervisory Framework for Measuring and Controlling Large Exposures, came into force in Hong Kong.

Further, a new Return of Large Exposures (Form MA(BS)28) was created to replace the existing MA(BS)1D. Two other relevant returns (Form MA(BS)1F and Form MA(BS)3) were also updated.



On 1 July 2019, the new IRRBB standards, which are an implementation of 2016 BCBS standard on IRRBB, came into force in Hong Kong. Instead of a formal rule, the standards came in the form of a Supervisory Policy Manual ("SPM") module (IR-1).

The return for reporting interest rate risk (Form MA(BS)12) was also revised.


A major consultation also took place:



Fundamental Review of the Trading Book ("FRTB")


On 29 June 2019, the HKMA issued a consultation paper on the revised market risk framework. This followed the publication of a revised version of FRTB by the BCBS in January 2019. Industry players provided their responses to the consultation paper on 30 September 2019.

According to the consultation, the HKMA intended to follow the implementation timeline set by the BCBS, which has an implementation deadline of 1 January 2022. However, there are some major jurisdictions that have already postponed their implementation timelines; banks locally incorporated in Hong Kong have expressed their concerns over the challenges that arise from the differing timeliness across their operating jurisdictions. In the latest circular issued by the HKMA on 17 December 2019, although the HKMA did not confirm their finalised timeline, they announced a transitional arrangement - banks would only need to implement FRTB for reporting purposes by 1 January 2022.


What is expected in 2020?

The provisions contained in the newly implemented rules and consultation papers from 2019 give us some insights as to what may happen next year.


Expectation for 2020

Large Exposure

On 1 January 2020, banks will need to attain full compliance with the single counterparty (or group of linked counterparties) and the connected party exposures limits after the six-month grace period ends.

31 March 2020 is the first reporting date where banks will be required to use the new MA(BS)28 form for reporting large exposure. Banks that are still in the process of managing this changeover should utilise the remaining time before the March deadline to upgrade their systems and procedures.



A second round of consultation is expected in the months following the HKMA’s review of industry responses to the first round of consultation.

In the latest circular issued by the HKMA on 17 December 2019, the HKMA also mentioned they would conduct a local quantitative impact study ("QIS") for assessing new standards' impact on banks early next year.

Counterparty Credit Risk

Both the standardised approach for measuring counterparty credit risk exposures (“SA-CCR”) and capital requirements for bank exposures to central counterparties (“CCP standard”) are expected to be implemented some time in 2020.

Furthermore, according to the latest Basel progress report, the consultation on the revised credit valuation adjustment ("CVA") framework is expected to be published within 2020.

Capital Requirements for Banks’ Equity Investments in Funds

The HKMA also intends to implement the capital requirements for equity investments in funds in 2020. However, the industry is still waiting for the draft rules from the HKMA related to the IRB Approach which is expected to be published soon.

Revised Credit Risk and Operational Risk Framework

The HKMA has been conducting QIS on the revised IRB approach, the revised standardised approach for credit risk, the revised operational risk framework, and the output floor. More rounds of QIS are expected to continue in 2020.

According to the latest Basel progress report, the HKMA is developing policy frameworks for these standards and we may have more details soon in 2020.


Where we go from here

Hong Kong has made considerable progress regarding Basel standards in 2019. In 2020, with consultations and implementations of various Basel standards in motion, banks operating in Hong Kong need to formulate holistic plans and reserve sufficient resources, especially when there are many other competing priorities on the horizon such as the reference rate reform.

Within the organisation, careful considerations and diligent analyses are necessary for assessing the impacts on their capital position as well as operations for standards in consultation stage. For standards that are due for implementation, decisions on things like whether the change-the-bank processes shall be done internally or require external assistance, the governance structure, the amount of investment in procedure and system upgrades etc. are all difficult to make and demand collaboration among various functions. For overseas subsidiary / branches, this means that while they can leverage the work being done by their home office, they may also struggle to alter their head office's processes in order to address differences between Hong Kong and their home country.

Outside the organisation, communication with the HKMA is vitally important. The HKMA and banks may have differing thoughts on the complexity of the changes and the capital impact etc.; these discussions can be a lengthy process. In particular, it is difficult, and sometimes necessary, for banks to negotiate with the HKMA for a more proportional or tiered approach to implementation, similar to what may have been needed during the previous liquidity risk reform. Also, banks need to have discussions with the HKMA about a reasonable timeline of implementation. For example, banks' feedback to the first consultation of FRTB has led the HKMA to reconsider the local implementation timeline of FRTB.

All in all, challenges will continue to manifest along the remaining journey towards the full implementation of Basel IV in Hong Kong.

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