5 August 2020
On 10 July 2020, the MA issued an updated Guideline, superseding the 2018 version. The Guideline provides guidance in relation to the Banking Ordinance’s minimum criteria for obtaining a banking or deposit taking license. Several technical changes have been made following recent changes to the supervisory regime. The most significant ones relate to (i) fitness and propriety of proposed directors and executive candidates, (ii) financial resources, (iii) liquidity for institutions and (iv) control of large exposures. Some of the key amendments are listed below:
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Under item 15, directors and chief executives must now also have “necessary” skills to fulfil their duties and in respect of their authorized institution (“AI”)’s affairs generally (rather than just their “particular” duties).
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Under item 16 (relating to the MA’s right to require a face-to-face meeting with proposed candidates for an AI’s board of directors or chief executive), the purpose of such meeting is now for the MA to understand (rather than just assess) a candidate’s qualities and also, now, his/her understanding of the Hong Kong banking industry and to convey the MA’s expectations. Item 19(b) further specifies that the MA will take into account a candidate’s relevant knowledge (e.g. about the banking industry in Hong Kong) and necessary experience in banking business, in order for him to administer the AI’s affairs effectively in his assessment of a candidate’s suitability.
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Under item 53 (in relation to the adequacy of an AI applicant’s financial resources), AIs are required to agree internal leverage ratio targets as well as capital ratio targets with the MA.
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New items 56 – 58 have been added to the Guideline in respect of Loss-absorbing Capacity requirements (“LAC”).
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Item 56 states that a locally incorporated AI which is a resolution entity or material subsidiary under the Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements—Banking Sector) Rules (“LAC Rules”) must comply with the LAC Rules. (Briefly, resolution entity and material subsidiary here refer to an AI and its group companies classified by the MA as entities that are systemically important, where their non-viability will pose risks to the financial stability in Hong Kong.)
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Item 57 refers AIs to the Code of Practice chapter “Resolution Planning – LAC Requirements” for further elaboration of the MA’s discretionary powers.
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Item 58 requires all AIs to meet LAC ratios set for them and provides that if a resolution entity or material subsidiary fails to do so, the MA will require the resolution entity or material subsidiary to remedy the contravention pursuant to the LAC Rules. Failure to do so may result in revocation of the AI’s authorisation.
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Paragraph 8 (items 72-77) (dealing with control of large exposures) has been generally updated to take into account the recent introduction of new exposure and concentration risk rules under the Banking (Exposure Limits) Rules and Banking (Exposure Limits) Code.
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New item 99 has been added, requiring resolution entities and material subsidiaries to make disclosures with respect to their loss-absorbing capacity under LAC Rules.
For further information, please contact:
Simon Deane, Partner, Deacons
simon.deane@deacons.com
