On 13 Dec 2024, the HKMA updated CR-L-1 (V.4) to clarify consolidated supervision under BELR Rule 6, specifying subsidiary inclusion criteria (excluding insurance underwriters) and solo-consolidation requirements. The guidance mandates Als to report structural changes under Rule 6(3A) and align Tier 1 capital calculations with the HKMA's consolidation basis, ensuring group-wide concentration risk management without circumventing statutory limits.
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 Supervisory Policy Manual CR-L-1 (V.4) to clarify the application of consolidated supervision of concentration risks under Banking (Exposure Limits) Rules (BELR) Rule 6, superseding previous guidelines including CR-L-1 (V.3) dated 27 Dec 2019.
Rule 6 Implementation and Transition
The document clarifies that Rule 6(1) of the BELR (replacing former Section 79A of the Banking Ordinance) empowers the HKMA to require authorized institutions (Als) to apply BELR provisions on unconsolidated, consolidated, or solo-consolidated bases via Rule 6 notices. Transitional provisions (Part 9 of BELR) deem pre-1 July 2019 Section 79A notices as Rule 6 notices, ensuring continuity for compliance with Parts 2, 3, 6, 7, and 8 of the BELR.
Subsidiary Inclusion Criteria
The HKMA will require consolidation of subsidiaries undertaking financial business (e.g., banking, insurance, leasing) or incurring BELR-regulated risks (e.g., large exposures, connected lending), excluding insurance underwriting subsidiaries for BELR purposes. Overseas subsidiaries within these categories must be included unless strong justification exists (e.g., local law preventing customer data disclosure), provided the parent Al maintains adequate risk monitoring controls. Subsidiaries are excluded from consolidation only if they add negligible balance sheet size, not merely due to small scale.
Solo-Consolidation and Capital Requirements
Solo-consolidation (applying BELR limits to the Al and selected subsidiaries as a single entity) is permitted only for wholly-owned subsidiaries meeting strict criteria: (a) integral to the Al's operations; (b) financed solely by the Al with no external creditors (except for minor operational costs); and (c) no regulatory/legal constraints on capital transfer. Rule 6(3A) mandates Als to notify the HKMA promptly of structural changes (e.g., subsidiary status changes, significant activity shifts), with timeliness assessed case-by-case. Tier 1 capital for BELR compliance must align with the consolidation basis specified in the Rule 6 notice, with investments in non-consolidated subsidiaries deducted per Banking (Capital) Rules.
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