On 13 Dec 2024, the HKMA issued supplementary guidance to ensure consistent application of the revised credit risk framework under the BCAR effective 1 January 2025. The guidance supersedes prior Q&A documents on IRB approaches, counterparty risk, and securitization, incorporating industry feedback and clarifications on Basel requirements. It establishes a framework for ongoing updates to address interpretative issues and evolving regulatory standards.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction
On 13 Dec 2024, the Hong Kong Monetary Authority (HKMA) issued supplementary guidance to facilitate consistent application of the revised credit risk framework under the Banking (Capital) (Amendment) Rules 2023 (BCAR), which takes effect on 1 January 2025. The guidance, developed following consultation with industry associations, supersedes prior HKMA guidance documents and incorporates responses to industry feedback and recent clarifications.
Scope and Purpose
The guidance provides detailed implementation instructions for the BCAR's revised credit risk framework, primarily in Q&A format across six chapters. It addresses administrative arrangements for ECAI ratings (Chapter II), the Standardised Treatment of Credit (STC) approach (Chapter III), the Internal Ratings-Based (IRB) approach (Chapter IV), counterparty credit risk (Chapter V), and securitization (Chapter VI). The guidance aims to resolve interpretative ambiguities and align with Basel Committee requirements not fully incorporated in the BCAR.
Key Superseded Guidance
Chapter IV supersedes the HKMA’s 2014 ‘IRB Approach’ Q&A guidance, while Chapter V updates the 2021 counterparty credit risk capital standard to reflect BCAR’s reclassification of CVA risk from counterparty credit risk to market risk. Chapter VI updates the 2018 securitization implementation guidance, revising section 230 references in the Banking (Capital) Rules (BCR).
Ongoing Implementation Process
The HKMA confirmed the guidance issuance is part of a continuing process, with future updates to address common interpretative issues or incorporate new Basel Committee guidance. Authorized institutions may submit specific queries to their HKMA supervisory contacts for further clarification, and the guidance is accessible via the HKMA’s public website and Supervisory Communication Website.
Chapter IV Revision Note
Chapter IV is currently under revision to accommodate the review of the SPM module CA-G-4 on ‘Validating Risk Rating Systems under the IRB Approach’, as referenced in HKMA letters dated 29 November 2024 to the Hong Kong Association of Banks and the DTC Association.
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