On 13 Dec 2024, the HKMA issued supplementary guidance clarifying ECAI nomination requirements under the Banking (Capital)(Amendment) Rules 2023, mandating banks to nominate ECAIs with 'reasonable coverage' for specific portfolios and transition existing nominations. The guidance prohibits using ECAI ratings with implicit government support assumptions for non-public banks post-transitional period and requires consistent ECAI rating usage for risk-weighting and risk management, with HKMA monitoring progress on non-government-support ratings.
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ECAI Nomination Requirements under Revised Framework
On 13 Dec 2024, the HKMA issued supplementary guidance on the use of External Credit Assessment Institution (ECAI) ratings under the Banking (Capital)(Amendment) Rules 2023, clarifying requirements for banks to nominate ECAIs for risk-weighting exposures. Banks must nominate ECAIs per §4C for all ECAI ratings-based portfolios, ensuring 'reasonable coverage' of significant exposures. Type B ECAIs (with limited market/region scope) may only be nominated for exposures within the HKMA-recognized scope, published on the HKMA website upon Part 3 commencement. Banks using STC/SEC-ERBA solely for output floor calculations must also comply with §4C nomination requirements.
Transition of Existing Nominations and New Portfolio Requirements
Existing nominations for securitization exposures remain effective post-§4C commencement per §4E, but new nominations are required for specific portfolios: multilateral development banks, unspecified multilateral bodies, covered bonds, QNBFI exposures, general corporate exposures, and specialized lending. Classification changes necessitate reassessment of ECAI coverage for securities firm and corporate exposures (e.g., insurance firms reclassified as QNBFI). Banks must declare compliance with §4C(3)/(4) in written notices to HKMA, without submitting 'reasonable coverage' assessments, though documentation is required. Notices may be submitted pre-commencement but must specify the effective date as §4C's commencement date.
Consistent Usage and Restrictions on ECAI Ratings
Banks must use nominated ECAI ratings consistently for risk-weighting and risk management (§4D), seeking HKMA consent for any changes to nominations. Solicited ratings are required; unsolicited ratings may only be used where no solicited rating exists. ECAI ratings must reflect the full exposure amount (principal and interest) per §54F(1)(a). Ratings for one entity within a group cannot be applied to other group entities. Banks must avoid cherry-picking ratings or arbitrary changes to ECAI usage.
Government Support Assumptions and Transitional Period
Banks may continue using ECAI ratings with implicit government support assumptions for public banks (defined per §2(1)) beyond the 5-year transitional period under §54F(1)(b). Post-transitional period (§54F(1)(c)), ECAI ratings incorporating such assumptions must be excluded when determining credit quality grades (§54E), unrated exposure status (§51(1)), and mapping to risk-weights. Banks cannot adjust ratings to remove government support impacts. The HKMA will monitor ECAIs' progress in providing non-government-support ratings and review policy near the transitional period's expiry.
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