On 19 Dec 2025, the HKMA published the updated LM-1 Regulatory Framework for Supervision of Liquidity Risk (V.5), superseding the previous version. The framework establishes statutory liquidity requirements including the LCR (100% minimum for category 1 institutions), LMR (25% minimum for category 2 institutions), NSFR (100% minimum for category 1 institutions), and CFR (75% minimum for category 2A institutions), with detailed guidance on implementation, institutional designation, notification requirements, and liquidity disclosure standards.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction
On 19 Dec 2025, the Hong Kong Monetary Authority (HKMA) published the updated LM-1 Regulatory Framework for Supervision of Liquidity Risk (V.5), superseding the previous version dated 13.12.2024. This statutory guideline provides comprehensive guidance to authorized institutions (Als) on the application of the Banking (Liquidity) Rules, establishing the regulatory framework for liquidity risk management in Hong Kong.
Statutory Liquidity Requirements
The framework establishes four key statutory liquidity requirements: the Liquidity Coverage Ratio (LCR) for category 1 institutions, the Liquidity Maintenance Ratio (LMR) for category 2 institutions, the Net Stable Funding Ratio (NSFR) for category 1 institutions, and the Core Funding Ratio (CFR) for designated category 2A institutions. The LCR requires category 1 institutions to maintain a ratio of high-quality liquid assets to total net cash outflows of at least 100% by 2019, with phased implementation from 2015. The LMR requires category 2 institutions to maintain a ratio of liquefiable assets to qualifying liabilities (after deductions) of at least 25% on average monthly. The NSFR requires category 1 institutions to maintain a ratio of available stable funding to required stable funding of at least 100%, while the CFR requires category 2A institutions to maintain a ratio of available core funding to required core funding of at least 75% from 2019.
Institutional Designation Framework
The framework establishes a detailed designation system for categorizing institutions. Category 1 institutions are designated based on specific grounds including international activity, significance to Hong Kong banking system stability, material liquidity risk, and potential for regulatory arbitrage. Category 2A institutions, a subset of category 2 institutions, are designated based on business size and liquidity risk profile. The HKMA may exercise discretion to designate overseas incorporated banks as category 1 institutions if they meet specific criteria related to group-level liquidity management and supervision.
Implementation and Calculation Methodologies
The framework provides detailed guidance on implementing the statutory liquidity ratios on Hong Kong office basis, unconsolidated basis, and consolidated basis. It specifies the treatment of various asset classes including cryptoassets, residential mortgage-backed securities (RMBS), and structured financial instruments. The document includes specific guidance on the monetization of high-quality liquid assets under financial stress, with provisions allowing category 1 institutions to temporarily reduce their LCR below the minimum requirement under specific circumstances.
Notification Requirements and Supervisory Responses
The framework establishes comprehensive notification requirements for liquidity events, including failure to maintain minimum liquidity ratios, anticipated changes affecting liquidity positions, and the use of alternative liquidity approaches. The HKMA may require institutions to take remedial actions, including improving liquidity positions, submitting recovery plans, or implementing enhanced reporting, when relevant liquidity events occur. The framework also outlines the self-rectification mechanism for temporary NSFR shortfalls, allowing institutions a 30-day period to rectify shortfalls between 90% and 100% without being considered in breach.
Liquidity Disclosure Standards
The framework specifies liquidity disclosure requirements under the Banking (Disclosure) Rules, mandating annual disclosures of liquidity risk management approaches and quarterly disclosures of applicable statutory liquidity ratios. The HKMA encourages institutions to make additional voluntary disclosures regarding liquidity cushions and collateral requirements arising from credit rating downgrades, enhancing transparency in the banking sector.
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