On 19 Dec 2025, the HKMA issued CA-G-5 Supervisory Review Process, establishing a comprehensive framework for the MA's assessment of capital adequacy under Pillar 2 of the capital adequacy framework. The document differentiates the Pillar 2 capital requirement into P2A (risks not captured under Pillar 1) and P2B (cushion of capital for resilience), and sets out detailed supervisory standards for the Capital Adequacy Assessment Process (CAAP) that Als must follow, with the document replacing previous versions and taking effect on 1 January 2026.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction
On 19 Dec 2025, the Hong Kong Monetary Authority (HKMA) issued CA-G-5 Supervisory Review Process, a statutory guideline that sets out the MA's approach to conducting the Supervisory Review Process (SRP) under Pillar 2 of the capital adequacy framework, replacing previous versions (V.1 to V.6) and taking effect on 1 January 2026.
Regulatory Framework and Legal Basis
The document establishes the MA's legal authority under §97F of the Banking Ordinance to require authorized institutions (Als) to observe a minimum capital adequacy ratio (CAR) in excess of the Banking (Capital) Rules (BCR) minimum CAR and to set appropriate buffer levels based on the MA's assessment of individual Als' risk profiles, with the MA empowered to vary capital requirements to reflect the specific risk profile of each institution.
Pillar 2 Capital Requirement Structure
The document differentiates the Pillar 2 capital requirement into two components: P2A (reflecting risks not captured under Pillar 1) which forms part of the §97F minimum CAR, and P2B (a cushion of capital to bolster resilience in times of stress) which determines whether the BCR buffer level needs to be increased, with P2B being constituted solely by Common Equity Tier 1 (CET1) capital and not double-counted with the BCR buffer level.
Assessment Framework for Capital Adequacy
The MA assesses capital adequacy through a comprehensive framework considering common assessment factors (inherent risks, systems and controls, capital strength, corporate governance) and specific assessment factors (risk increasing and risk mitigating factors), using a scoring system for common factors and case-by-case consideration for specific factors, with the overall risk profile categorized as 'low', 'moderate', or 'high'.
Capital Adequacy Assessment Process (CAAP) Requirements
The document sets out supervisory standards for the Capital Adequacy Assessment Process (CAAP), requiring Als to have a CAAP that assesses their overall capital adequacy in relation to their risk profile, with specific requirements for internal control and governance, risk management, capital planning, and documentation, and mandating that Als conduct regular stress tests appropriate to their business nature and major risk sources.
Implementation and Review Process
The MA conducts the SRP on Als regularly (normally once a year) as part of risk-based supervision, with a structured review process involving the SRP Approval Committee and SRP Approval Review Committee to ensure quality, objectivity, and consistency in assessments, and requiring Als to provide representations within 14 days of receiving a draft notice proposing changes to their §97F minimum CAR or buffer level.
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