On 27 Nov 2025, the HKMA issued CA-G-1 V.5, updating Hong Kong's capital adequacy framework for locally incorporated authorized institutions to align with Basel III standards under the Banking (Capital) (Amendment) Rules 2025. The proposals establish minimum CAR ratios of 4.5%/6%/8%, introduce conservative risk-weighting for cryptoasset exposures (Group 2b), and reinforce the output floor phase-in. Compliance requires solo/consolidated CAR/LR adherence, non-statutory internal capital targets, and strict enforcement for breaches under the Banking Ordinance.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction
On 27 Nov 2025, the Hong Kong Monetary Authority (HKMA) published Version 5 of the Supervisory Policy Manual (SPM) module CA-G-1, 'Overview of Capital Adequacy Regime for Locally Incorporated Authorized Institutions', superseding Version 4 dated 29 Nov 2024. The update implements the Banking (Capital) (Amendment) Rules 2025, effective 1 January 2026, and refines the capital adequacy framework for Hong Kong-incorporated authorized institutions (Als) under Basel III standards.
Key Regulatory Framework Updates
The proposals establish minimum capital adequacy ratios (CAR) of 4.5% (CET1), 6% (Tier 1), and 8% (Total capital) under §3B of the Banking (Capital) Rules (BCR). Als must comply with solo and consolidated CAR and leverage ratio (LR) requirements, with the minimum LR set at 3% under §3Z of the BCR. The HKMA retains authority under §97F of the Banking Ordinance to vary minimum CAR requirements based on an institution's risk profile, subject to consultation and potential review by the Banking Review Tribunal.
Capital Composition and Risk-Weighting Framework
The framework details tiered capital composition (CET1, Additional Tier 1, Tier 2), with strict eligibility criteria for capital instruments under Schedules 4A–4C of the BCR. Significant updates include the introduction of cryptoasset exposure risk-weighting rules (Section 8.7), requiring conservative treatment for Group 2b exposures (§385 BCR) and separate risk-weighting for Group 1b exposures. The output floor phase-in (50% to 72.5% by 2030) and sovereign concentration risk add-ons (Section 8.11) are also reinforced.
Cryptoasset-Specific Requirements
Section 8.7 mandates distinct risk-weighting approaches for cryptoasset exposures: Group 1a follows traditional asset rules; Group 1b requires separate credit risk calculations for reference assets and redeemers; and Group 2b applies conservative capital charges. The framework explicitly prohibits Internal Models Approach (IMA) for Group 2a cryptoasset market risk (§8.9.13) and restricts Standardized CVA Approach (SA-CVA) for Group 2a covered transactions (§8.9.14).
Compliance and Enforcement
Als must maintain non-statutory internal capital targets above minimum requirements (Section 9.5) and submit annual external auditors' reports under §63(3) of the Banking Ordinance. Breaches of CAR/LR requirements trigger mandatory MA notifications under §3D/§3ZA of the BCR, with failure to comply constituting an offence punishable by fines and imprisonment under §97D(3) and §97E(4).
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