On 18 Jul 2025, the HKMA published revised SPM module CA-G-4 to update supervisory expectations for validating risk rating systems under the IRB approach, aligning with Basel Committee guidance and HKMA's supervisory experience. The revision replaces the prior module and takes effect immediately, reflecting the removal of the minimum IRB coverage ratio under the Basel III Final Reform package implemented in January 2025, which grants AIs greater flexibility to combine the STC and IRB approaches for credit risk capital calculations.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction and Effective Date
On 18 Jul 2025, the Hong Kong Monetary Authority (HKMA) issued a revised version of Supervisory Policy Manual (SPM) module CA-G-4, 'Validating Risk Rating Systems under the IRB approach', as a statutory guideline under section 7(3) of the Banking Ordinance, effective immediately upon publication.
Purpose and Key Revisions
The revisions primarily align the SPM module with the latest Basel Committee on Banking Supervision guidance on the internal ratings-based (IRB) approach for credit risk capital calculations and incorporate updated HKMA supervisory expectations based on its assessment experience. The changes replace the previous version of module CA-G-4, reflecting the HKMA's enhanced supervisory requirements for authorized institutions (AIs) using the IRB approach to validate their risk rating systems.
Implementation Context and Flexibility
The revision takes effect concurrently with the implementation of the Basel III Final Reform (B3F) package on 1 January 2025, which removed the mandatory minimum IRB coverage ratio. Consequently, AIs now have greater flexibility to combine the standardized (STC) and IRB approaches for credit risk capital calculations, subject to meeting relevant requirements, including for AIs previously approved for the IRB approach.
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