On 12 Feb 2025, the HKMA issued guidance requiring authorized institutions to disclose capital adequacy ratios adjusted for significant unrealised losses on held-to-maturity debt securities (exceeding 10% of Common Equity Tier 1 capital) and to implement robust model governance for behavioural models used in interest rate risk measurement. The guidance supplements existing capital and risk management frameworks without altering them, emphasizing enhanced transparency, robust internal controls, and adherence to best practices in model validation and oversight.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
Market Misconduct Tribunal: A Guide to Penalties and Other Consequences for Misuse of Insider Information
Market Misconduct Tribunal proceedings for mishandling of insider information can result in fines and disgorgement orders
Disclosure Of Material Non-Public Price Sensitive Information (MNPI): A Guide For Hong Kong Listed Companies
New legislation in Hong Kong introduces a statutory regime for the disclosure of price sensitive information by SEHK listed companies. The regime substantially
SPOTLIGHT ON
FAMILY OFFICES
Introduction
On 12 Feb 2025, the Hong Kong Monetary Authority (HKMA) issued a circular providing further guidance to authorized institutions (AIs) on strengthening interest rate risk management, incorporating observations from recent reviews of AIs' practices regarding disclosure of capital adequacy ratios adjusted for unrealised losses on debt securities and the use of behavioural models for measuring interest rate risk in the banking book (IRRBB).
Disclosure of Adjusted Capital Adequacy Ratios (CARs)
The HKMA guidance requires AIs to closely monitor unrealised losses on debt securities held to maturity (HTM debt securities) and consider disclosing adjusted CARs when such losses exceed 10% of Common Equity Tier 1 capital. AIs must notify the HKMA promptly upon exceeding this threshold to seek guidance on disclosure timing and manner. AIs must also implement robust systems for computing and monitoring these losses and communicate disclosure intentions clearly to the public to prevent market concerns. This guidance supplements, but does not alter, the existing capital adequacy framework, including its three pillars.
Guidance on Behavioural Models for IRRBB Measurement
The HKMA mandates enhanced model governance for AIs using behavioural models to measure IRRBB, particularly for non-maturity deposits. AIs must establish a comprehensive governance framework including sound policies, documentation, independent validation, ongoing monitoring, and senior management oversight. Senior management must approve all model adoption, significant changes, and overlays. AIs must backtest model outputs (including core deposit proportions and behavioural maturity) before implementation and at least annually thereafter. AIs must promptly notify the HKMA of any intention to adopt new behavioural models or make major changes to existing models. The HKMA also highlighted good industry practices in Annex 2 for AIs to consider when strengthening their approaches.
View the full article:Source
