On 13 Dec 2024, the HKMA issued supplementary guidance clarifying the implementation of the Revised Credit Risk Framework under the Banking (Capital)(Amendment) Rules 2023. The guidance details due diligence requirements, eligible covered bonds, bank exposure risk-weighting, real estate classification criteria, currency mismatch rules, and off-balance sheet treatment. Key clarifications include exemptions for immaterial exposures, LTV calculation for composite properties, and natural hedge requirements for retail exposures.
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 on the Revised Credit Risk Framework under the Banking (Capital)(Amendment) Rules 2023, clarifying implementation requirements for the Standardized Credit Risk (STC) approach. The guidance addresses key operational and regulatory interpretations across multiple exposure categories to ensure consistent application of capital adequacy standards.
Due Diligence Requirements
The guidance clarifies that banks must conduct independent credit assessments for both rated and unrated exposures, with sophistication commensurate to the exposure's size and complexity. Exemptions apply to immaterial exposures (e.g., utility deposits), while climate-related financial risks must be integrated into credit assessments on a best-effort basis. Banks may leverage parent bank's internal credit ratings only under limited circumstances, such as identical credit rating systems for the same bond exposure.
Eligible Covered Bonds
Covered bonds qualify for favorable risk-weighting if they meet three conditions: (1) cover pools include specified assets (sovereigns, PSEs, residential/commercial real estate with LTV limits, or bank claims); (2) cover assets exceed outstanding bonds by 10%; and (3) banks provide semi-annual portfolio information. LTV ratios must be assessed per individual loan (not portfolio average), and the requirement applies to both inception and ongoing monitoring.
Bank Exposures and QNBFI Treatment
For bank exposures, the Standardized Credit Risk Assessment (SCRA) requires banks to evaluate both a counterparty's repayment capacity and compliance with minimum regulatory requirements. QNBFI exposures require entities to be subject to a regulatory framework equivalent to banks; single-regulator jurisdictions do not automatically qualify entities as QNBFIs. For QNBFIs, credit assessment grades (A/B/C) depend on meeting published regulatory requirements, with Hong Kong-supervised QNBFIs (e.g., insurers) assigned fixed 75% risk-weights.
Real Estate Exposure Classification
Regulatory real estate exposures require properties to be residential, secured by immovable property, and meet LTV limits (80% for residential, 60% for commercial). Material dependence on property cash flows must be assessed at origination, with exceptions for primary residences. Composite properties (e.g., mixed-use buildings) must be split into residential/commercial portions for risk-weighting, with transitional relief for pre-2025 loans.
Currency Mismatch Multiplier
The currency mismatch multiplier applies to retail exposures where the obligor's income currency differs from the loan currency. Natural hedges require acceptable financial assets (liquid, unencumbered, same currency), with calculations based on instalment-by-instalment coverage. For multi-currency income, the dominant currency is used for assessment, but natural hedges must cover 90% of each currency's instalment amounts.
Defaulted Exposures and Off-Balance Sheet Treatment
Defaulted real estate exposures secured by residential properties qualify for 100% risk-weight regardless of regulatory status. Off-balance sheet exposures use credit conversion factors (CCFs) of 10% for exempt commitments (e.g., uncommitted facilities with ongoing credit monitoring) and 40% for other commitments. Sale-and-repurchase agreements excluding repo-style transactions fall under Item 12 (100% CCF).
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