On 26 Sep 2024, the HKMA published Version 4 of CR-L-1 'Consolidated Supervision of Concentration Risks: BELR Rule 6', revising the framework for applying concentration risk limits on a group basis. The update clarifies notification requirements under Rule 6(3A), refines subsidiary inclusion criteria (excluding insurance underwriting subsidiaries from consolidation), and specifies consolidated Tier 1 capital treatment for compliance assessments. These amendments ensure alignment with the BELR's regulatory intent and Basel Committee standards for large exposures.
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Introduction and Purpose
On 26 Sep 2024, the Hong Kong Monetary Authority (HKMA) issued a revised version (V.4) of the Supervisory Policy Manual module CR-L-1 'Consolidated Supervision of Concentration Risks: BELR Rule 6', superseding previous versions to clarify the application of consolidated supervision under the Banking (Exposure Limits) Rules (BELR). The revision updates the regulatory framework for applying concentration risk limits on a group basis, ensuring alignment with the BELR's requirements and Basel Committee standards.
Key Regulatory Changes
The revised guidelines clarify that Rule 6(3A) requires authorized institutions (Als) to notify the HKMA 'as soon as practicable' of structural changes affecting consolidated subsidiaries, including subsidiary status changes, new subsidiaries, or significant shifts in principal activities. This replaces prior guidance on notification timeliness, emphasizing case-specific assessment based on event dynamics and Al-specific factors. The document also revises subsidiary inclusion criteria: consolidation under BELR now explicitly includes financial subsidiaries (e.g., those undertaking banking, insurance, or securities activities) unless excluded under specific conditions, while excluding insurance underwriting subsidiaries from consolidation for BELR purposes. This aligns with the HKMA's group-wide supervision approach under SPM module CS-1.
Consolidation Framework and Capital Treatment
The revision specifies that solo-consolidation (where only certain subsidiaries are included) requires all subsidiaries to meet three criteria: (a) being wholly owned and managed as an integral part of the Al, (b) being wholly financed by the Al with no external creditors beyond operational expenses, and (c) having no regulatory constraints on capital transfer. Tier 1 capital calculations for BELR compliance must now use solo-consolidated/consolidated Tier 1 capital (not solo Tier 1 capital) where Rule 6 requires consolidated application, and investments in non-consolidated subsidiaries must be deducted per Banking (Capital) Rules (BCR) requirements. The HKMA retains discretion to exclude overseas subsidiaries from consolidation only where strong justifications exist, such as local law restrictions on data disclosure, provided robust internal controls are in place.
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