On 26 Sep 2024, the HKMA revised CR-G-8 to clarify large exposure controls, introducing a Category A/B credit risk transfer framework, refining LC group formation rules for economic dependence, and providing detailed guidance on the clustering limit. The revision mandates enhanced reporting via MA(BS)28, with breaches requiring immediate HKMA notification and potentially triggering enforcement actions including higher capital requirements or authorization revocation.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction
On 26 Sep 2024, the Hong Kong Monetary Authority (HKMA) issued the revised Supervisory Policy Manual (SPM) module CR-G-8 'Large Exposures and Risk Concentrations' (V.4), superseding previous versions to clarify regulatory expectations for controlling large exposures and risk concentrations among Authorized Institutions (Als). The revision introduces key amendments to credit risk transfer frameworks, LC group formation rules, and clustering limits while maintaining statutory exposure limits under the Banking (Exposure Limits) Rules (BELR).
Credit Risk Transfer Framework
The revision establishes a Category A/B institution classification for credit risk transfer (CRM) treatment. Category A institutions (internationally active/systemically important Als) must apply the comprehensive CRM framework under Part 7, while Category B institutions (all others) may use a simplified approach for specific exposures (e.g., CCR exposures with recognized netting or cash collateral). Category B institutions may opt for Category A treatment if they demonstrate adequate systems via HKMA approval, requiring validated exposure calculation processes and independent reviews. The HKMA will annually review Category A designations, distinct from Liquidity Rules categorization.
Group of Linked Counterparties (LC Group) Rules
The revision clarifies economic dependence criteria for LC group formation under Rule 41. Als may exclude entities economically dependent on a reference counterparty if the exposure to that counterparty is ≤5% of Tier 1 capital or the counterparty is an exempted sovereign entity. Economic dependence is defined by specific criteria (e.g., 50%+ revenue dependence, shared funding sources), with one-way dependence (e.g., Entity A dependent on Entity B) requiring only Entity A to be grouped under Entity B. The HKMA emphasizes Als should identify only direct economic dependencies, not indirect ones, though good practice encourages including indirect dependencies when known. Exempted sovereign entities and specified sovereign-owned entities (e.g., CIC, Huijin) receive special treatment under Rule 41(5) to avoid unnecessary grouping.
Clustering Limit Guidance
The HKMA provides detailed guidance on the clustering limit, requiring Als to set internal limits on aggregate non-exempt large exposures (≥10% of Tier 1 capital) to non-banks on unconsolidated and consolidated bases. The limit must be approved by the Board of Directors, with most Als operating within 200% of Tier 1 capital as a benchmark. The HKMA will assess acceptability based on capital adequacy, policy consistency, exposure characteristics, and risk management capabilities. Exposures covered by MA-approved letters of comfort are excluded from the clustering limit calculation.
Reporting and Consequences of Breaches
Als must report large exposures via the 'Return of Large Exposures' (MA(BS)28) and certify compliance via 'Certificate of Compliance' (MA(BS)1F). Breaches of statutory limits or HKMA-imposed prudential limits require immediate notification to the HKMA, including breach details, impact assessment, and remediation plans. Failure to comply constitutes an offence under Section 81C(2) of the Banking Ordinance, with penalties for the institution and its directors/management. The HKMA may impose higher capital requirements, restrict business expansion, or revoke authorization if breaches indicate inadequate risk controls or non-compliance with minimum authorization criteria.
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