The Hong Kong Monetary Authority (HKMA) concluded its annual review of Domestic Systemically Important Authorised Institutions (D-SIBs) on 31 December 2024. Following the evaluation, the list of designated D-SIBs remains unchanged from the one published on 29 December 2023.

The current list of D-SIBs, found in the annex, consists of HSBC, Bank of China, Standard Chartered Bank, Hang Seng Bank, and ICBC. These banks continue to hold this designation, which requires them to maintain additional capital buffers to mitigate systemic risk, which could potentially affect the financial system.

Under the D-SIB framework, authorised institutions designated as D-SIBs must integrate a Higher Loss Absorbency (HLA) requirement into their regulatory capital buffers within 12 months of receiving formal notification of their designation.

The HLA requirement, expressed as a percentage of an institution’s Common Equity Tier 1 (CET1) capital relative to its risk-weighted assets calculated under the Banking (Capital) Rules, ranges from 1% to 3.5%, depending on the assessed level of the institution’s systemic importance.

Only the first four buckets (ranging from 1% to 2.5%) are in use. However, the framework includes a reserved 3.5% bucket, encouraging D-SIBs to avoid increasing their systemic importance further.

Notably, there have been no changes to the HLA requirements for the designated D-SIBs compared to the list published in 2023.

Under sections 3U and 3V of the Banking (Capital) Rules, the Monetary Authority is authorised to designate D-SIBs and set Higher Loss Absorbency HLA requirements for each, based on their assessed level of systemic importance within the domestic financial system.

To implement this, the HKMA’s regulatory framework for D-SIBs assigns designated institutions to different HLA “buckets.” This tiered approach reflects the diverse nature and varying degrees of systemic importance among authorised institutions in Hong Kong, ensuring a more tailored and effective regulatory response.

The HLA requirement for D-SIB, along with the Countercyclical Capital Buffer, acts as an extension of the Basel III Capital Conservation Buffer. If a D-SIB’s Common Equity Tier 1 (CET1) capital ratio falls within the extended buffer range, the bank will face restrictions on discretionary distributions. This policy effectively requires D-SIBs to retain earnings to strengthen their regulatory capital, ensuring greater financial stability.

Imposing an HLA requirement on D-SIBs is a prudent and justified measure to minimise the likelihood of their failure. Given the significant impact their potential collapse could have on the domestic financial system and the broader economy, this precaution is necessary and sensible.

On a separate note, two of the banks in the list, HSBC and Standard Chartered, are part of the select few involved in HKMA’s gen AI sandbox initiative.

More information on the HKMA designation for D-SIBs are available here.