On 10 Dec 2025, the HKMA consultation proposes detailed guidance for valuation in resolution under the FIRO, specifying three statutory valuations (failing, resolution transaction, and NCWOL) with defined methodologies, appointment criteria for valuers, and iterative processes. The proposals aim to standardize valuation practices for resolution decisions and NCWOL compensation, with particular focus on group-wide resolution coordination for cross-border entities.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction
On 10 Dec 2025, the Hong Kong Monetary Authority (HKMA) launched an industry consultation on proposed guidance for valuation in resolution under the Financial Institutions (Resolution) Ordinance (Cap. 628) (FIRO), specifically Chapter VIR-1 of the Code of Practice. The consultation outlines the HKMA's approach to valuation in resolution (VIR), detailing statutory requirements, methodologies, and processes to inform resolution decisions and ensure fair creditor treatment under the FIRO's 'no creditor worse off than in liquidation' (NCWOL) safeguard.
Statutory Requirements
The proposals establish that the FIRO mandates three statutory valuations: (1) Pre-resolution valuation under section 35(1) to inform resolution initiation and stabilization options, requiring fair, prudent valuations based on realistic assumptions without assuming government support; (2) Post-resolution NCWOL valuation under sections 96–104 to assess compensation eligibility for pre-resolution creditors/shareholders; and (3) Appointment of independent valuers under section 96, with strict criteria prohibiting conflicts of interest and requiring expertise. The consultation clarifies that section 37(1) permits the HKMA to appoint a 'section 10 entity' to assist pre-resolution valuations, while section 96 mandates separate appointment of an independent valuer for NCWOL assessments.
Valuation Methodology and Output
The proposals define three valuation types: (a) Valuation 1 (failing or likely to fail valuation) assesses solvency and regulatory capital using updated accounting data; (b) Valuation 2 (resolution transaction valuation) estimates economic asset/liability values under stabilization options, including NCWOL compensation risk, using hold/disposal values and equity valuation models; and (c) Valuation 3 (NCWOL valuation) compares resolution treatment against a counterfactual winding-up scenario under Schedule 7 assumptions. The output requirements specify detailed reports covering methodologies, assumptions, and NCWOL risk assessments, with indicative value ranges where applicable.
Valuation Process
The consultation outlines an iterative valuation process commencing during contingency planning, with initial valuations based on recent financial data (e.g., month-end reporting) and iterative updates as conditions evolve. Key steps include data provision by authorized institutions (Als), validation of Al's valuation capabilities, and collaborative review between valuers and Als. Post-resolution, an independent valuer conducts Valuation 3 within three months of resolution initiation, with decisions taking effect after tribunal review or upon expiry of the review period. The timeline integrates Valuation 1/2 during stabilization and Valuation 3 during restructuring.
Group Resolution Considerations
For cross-border groups, the proposals require coordinated valuation approaches where the HKMA acts as host resolution authority. Valuation 1/2 must assess the Al's financial position and loss transfer needs via contractual mechanisms (e.g., intra-group LAC debt write-downs), leveraging group-wide valuations by the home resolution authority. If contractual loss transfer fails, the HKMA may initiate FIRO resolution, requiring separate Valuation 1/2 for the Al with additional equity valuation and NCWOL risk estimation. The consultation mandates ongoing coordination with home authorities to ensure orderly cross-border resolution.
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