On 24 Oct 2024, the HKMA published revised LAC guidance under Code of Practice LAC-1, establishing HK$300 billion as the asset threshold for LAC requirements and clarifying resolution strategies (bail-in for D-SIBs, contractual loss transfer for subsidiaries). The proposals introduce flexibility to reduce resolution component ratios for smaller banks using transfer stabilization options and update disclosure templates for LAC reporting, while maintaining strict compliance requirements for resolution entities.
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Introduction
On 24 Oct 2024, the Hong Kong Monetary Authority (HKMA) published revised guidance on Loss-Absorbing Capacity (LAC) requirements under the Financial Institutions (Resolution) Ordinance (FIRO), updating the Code of Practice chapter LAC-1 to clarify the HKMA's approach to resolution planning and LAC implementation for banking entities.
Key Regulatory Thresholds and Classification
The proposals establish HK$300 billion as the total consolidated asset threshold for classifying Hong Kong-incorporated authorized institutions (Als) as resolution entities subject to LAC requirements, while prioritizing resolution planning for Als exceeding HK$150 billion. The HKMA clarified that resolution entities (typically D-SIBs) will generally require external LAC requirements calibrated at twice their regulatory capital requirements, whereas material subsidiaries (entities meeting specific group criteria) will have lower internal LAC requirements.
Resolution Strategy Guidance
The HKMA specifies that preferred resolution strategies for resolution entities will typically involve 'whole bank bail-in' stabilization, while material subsidiaries will rely on 'contractual loss transfer' (with bail-in as backup). The guidance permits reducing the resolution component ratio (e.g., by up to 50%) for smaller Als where resolution strategies involve partial property transfer or whole bank transfer, provided the business is simple and resolvability is not compromised.
LAC Requirement Flexibility
The proposals introduce enhanced flexibility to vary LAC requirements: the resolution component ratio may be reduced for resolution entities with transfer-based strategies, the internal LAC scalar may be increased to 100% for Hong Kong-to-Hong Kong internal LAC instruments, and the minimum LAC debt requirement (currently one-third of LAC requirements) may be reduced below this threshold for entities facing implementation challenges.
Disclosure and Compliance Framework
The revised guidance updates disclosure templates for quarterly and semi-annual reporting of loss-absorbing capacity, creditor rankings, and instrument features, aligning with Basel Committee standards. It also clarifies requirements for resolution entities to notify the HKMA of non-compliance (Rule 60) and take remedial action (Rule 61), with enforcement under the FIRO.
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