The Hong Kong Monetary Authority (HKMA) has issued a report detailing the implementation of loss-absorbing capacity (LAC) requirements in Hong Kong’s financial sector.
The document provides a comprehensive analysis of the steps taken towards establishing a robust framework for LAC, which is essential for financial institutions (FIs) to absorb losses and support recapitalisation in situations of distress.
LAC is identified as a key component in ensuring that a failing financial institution can be stabilised and returned to viability without jeopardising financial stability.
It functions by allocating losses to shareholders and holders of LAC debt instruments, thereby discouraging risky behavior and safeguarding public funds.
The HKMA initiated the Financial Institutions (Resolution) (Loss-absorbing Capacity Requirements—Banking Sector) Rules in December 2018, aiming to secure sufficient LAC resources for the orderly resolution of banks.
The effort involved collaboration with authorised institutions, particularly those of systemic importance, to enhance their LAC resources in line with resolution planning requirements.
The report encompasses various aspects of the LAC framework, including the current status of LAC resources among authorised institutions, the characteristics of LAC debt instruments, compliance strategies, and the interplay between LAC requirements and capital regulations.
Eddie Yue, Chief Executive of the HKMA, said,
“Establishing sufficient LAC resources is an important aspect in enhancing the resolvability of banks and strengthening the resilience of the Hong Kong’s banking system.
We are delighted to share some of the key developments and milestones achieved. As part of our ongoing resolution planning process, the HKMA will continue to work closely with relevant banks on their build-up and maintenance of LAC resources in a prudent and proportionate manner, taking into account international experiences, as well as evolving economic and market conditions.”
Featured image credit: Edited from Unsplash
