On 26 January 2011, the HKMA issued a circular announcing that the Basel Committee on Banking Supervision ("BCBS") had issued the final element of the new regulatory capital requirements for Basel III (i.e. the Minimum requirements to ensure loss absorbency at the point of non-viability).
The HKMA announced that it intends to fully implement the Basel III reforms in Hong Kong. Implementation will begin on 1 January 2013 with full implementation by 1 January 2019.
The main elements of the Basel III reform package include:-
- strengthening the global capital framework by changes to the definition and criteria for Tier 1 and Tier 2 capital, increases to the minimum regulatory capital requirements in relation to risk-weighted assets, and improvements to the transparency of the capital base;
- reducing procyclicality by establishing a "capital conservation buffer" and a "countercyclical capital buffer";
- supplementing the risk-based capital requirement with a leverage ratio;
- enhancing risk coverage by strengthening capital requirements for counterparty credit risk exposures in banks' derivatives, repo and securities financing activities; and
- introducing global liquidity standards and monitoring metrics by imposing two minimum standards for funding liquidity (i.e. the Liquidity Coverage Ratio and the Net Stable Funding Ratio).
Remarks - Implementation of Basel III in Hong Kong will require amendments to the Banking Ordinance, the Banking (Capital) Rules and the Banking (Disclosure) Rules. A consultation on the draft amendments to the Banking Ordinance and related Rules is expected to be conducted in the third or fourth quarter of 2011.
In line with Hong Kong's established practice of applying the same capital standards to all banks, may they be internationally active or not, HKMA will apply the Basel III capital and liquidity standards to all locally incorporated authorised institutions ("AIs") on both a consolidated and unconsolidated basis.
The HKMA has stated it will be discussing implementation plans with individual authorised institutions (AIs) over the next few months to determine whether there will be any significant issues in complying with Basel III. However, in the interim period up to 1 January 2013, the HKMA will expect local AIs to take into account the revised definition of regulatory capital in their capital issuance planning. The HKMA will also be considering future guidance for the BCBS which is expected later this year and other foreign banking institutions.