On 12 Feb 2025, the HKMA issued guidance clarifying the calculation methodology for adjusted capital adequacy ratios (CARs) where authorized institutions hold held-to-maturity debt securities with unrealised losses. The guidance specifies adjustments to CET1 Capital and Total Capital by deducting accumulated unrealised losses, defines the treatment of hedging effects, and mandates consolidated calculation unless solo reporting applies. This ensures consistent disclosure of capital adequacy under the Banking (Capital) Rules.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction
On 12 Feb 2025, the Hong Kong Monetary Authority (HKMA) issued Annex 1 to its Interest Rate Risk Management guidance, providing detailed instructions for authorized institutions (AIs) on calculating capital adequacy ratios adjusted for unrealised losses on held-to-maturity (HTM) debt securities.
Purpose and Scope
The guidance specifies the methodology for calculating adjusted capital adequacy ratios (CARs), including the adjusted Common Equity Tier 1 (CET1) Capital Ratio and adjusted Total Capital Ratio, where AIs are required to disclose such adjusted ratios. It applies to AIs holding HTM debt securities with unrealised losses, ensuring consistency in reporting capital adequacy under the Banking (Capital) Rules.
Key Calculation Methodology
The guidance establishes a structured calculation framework: adjusted CET1 Capital equals (a) CET1 Capital minus (b) accumulated unrealised losses on HTM debt securities; adjusted Total Capital equals adjusted CET1 Capital plus (d) non-CET1 Capital. Adjusted Total Risk-Weighted Assets (RWA) is derived by subtracting (g) RWA measured at amortised cost from (f) total RWA and adding (h) RWA measured at fair value. Accumulated unrealised losses are defined as the carrying amount minus fair value (where fair value is lower), with hedging effects recognisable under applicable accounting standards if qualifying for hedge accounting and applied consistently.
Basis and Application
The adjusted CARs must be calculated on a consolidated basis unless the AI is only required to compute CARs on a solo basis under the Banking (Capital) Rules, in which case the adjusted CARs are calculated on a solo basis. The guidance clarifies that Common Equity Tier 1 Capital, Total Capital, and Total RWA retain their definitions under the Banking (Capital) Rules, and the calculation logic for adjusted Tier 1 Capital Ratio mirrors that of the adjusted CET1 Capital Ratio.
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