Hong Kong strengthens banks’ resilience to shocks by implementing loss-absorbing capacity rules

In line with recent global priorities, Hong Kong has been working towards further safeguarding financial stability by strengthening banks’ resilience to shocks. The implementation of FIRO in 2017, the statutory resolution framework, was the first step in the process. FIRO gives the Hong Kong Monetary Authority (“HKMA”) wide powers to intervene and manage a within scope bank when it becomes non-viable. Another key pre-requisite identified by the HKMA is to ensure that Hong Kong banks have enough financial resources to absorb losses so that it is the shareholders and creditors (rather than taxpayers) that are first in line to meet any losses. Hong Kong’s loss-absorbing capacity (“LAC”) rules (the “LAC Rules”) aim to ensure that Hong Kong banks have sufficient financial resources that can bear losses ahead of other liabilities and/or provide recapitalisation resources. The LAC Rules are scheduled to come into effect on 14 December 2018. The LAC Rules generally align with the provisions set out in the Financial Stability Board’s term sheet on total-loss absorbing capacity (“TLAC”) for G-SIBs, subject to a few adjustments necessary for the Hong Kong market. In this alert, we will provide some background to the LAC Rules, an overview of the application and timing of the LAC Rules and a summary of the LAC requirements and eligibility criteria. In the second part of this alert, we will focus on LAC debt instruments and certain practical implications on the issue of LAC debt instruments.

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