Hong Kong plans final Basel II rules by end of year
HONG KONG, March 4 - Hong Kong regulators plan to complete by the end of this year the drafting of detailed rules for implementing the international Basel II bank safety accord.
The aim is to help Hong Kong banks with early preparation for the new regime, which is intended to bolster the solvency of the world's banking system.
Hong Kong Monetary Authority deputy chief executive William Ryback said the HKMA will work closely with the banking industry to ensure implementation of Basel II in Hong Kong by the end of 2006, in accordance with the Basel timetable.
Ryback was commenting on the planned introduction on April 6 of the Banking (Amendment) Bill 2005, whose main purpose is to implement Basel II, into Hong Kong's Legislative Council, the law-making body of China's special administrative region. The Bill was formally published today.
The Bill empowers the HKMA, Hong Kong's central bank and banking supervisory agency, to prescribe the rules for bringing the complex, risk-based Basel II banking pact into effect under subsidiary legislation that will be vetted by the Council.
The Bill, which amends Hong Kong's Banking Ordinance, also contains a small number of proposals aimed at enhancing the operation of the ordinance, including extending the ceiling of the minimum capital adequacy ratio of licensed banks to 16% from 12%.
Hong Kong is making good progress in giving effect to Basel II, credit rating agency Standard & Poor's says in a report this week on Basel II implementation in the Asia-Pacific region. S&P expects about one-third of Hong Kong banks to adopt internal ratings based approaches to measuring their credit risk with the rest using the simpler standardised approach.
The agency says the best progress in the region is being made in Australia and Singapore, although banking systems in both countries are contending with significant challenges in meeting implementation timetables.
The aggregate risk-adjusted assets of Hong Kong's banking sector are likely to remain relatively flat with the introduction of Basel II, S&P says. The agency notes that the consolidated capital adequacy ratio of all locally incorporated banks as of September 2004 stood at 15.9%, much above the Basel minimum capital requirement of 8%. For Hong Kong banks under Basel II, a cut in risk-adjusted assets relating to residential mortgages and other retail lending is likely to be partly offset by an increase in the risk-adjusted assets required to meet the risks of corporate lending.
Japan is also making good progress on Basel II, while some countries in the Asia-Pacific region, including Korea, China, Thailand and Malaysia, are opting for a more gradual and phased implementation, S&P notes.
Last month, Hong Kong and Shanghai Banking Corporation chairman David Eldon said any capital savings on credit risk that might arise in Hong Kong for the bank and its UK parent, HSBC, will be offset by additional capital requirements for operational risk.
Eldon said he doesn't expect all banks in all markets in Asia to embrace Basel II, both because of the complexity of the new rules and because of the diversity within the region.
Some 100 countries have said they plan to implement the Basel II rules, which aim to get banks to align their capital more accurately to the risks they face, either in accord with the recommended timetable or later.
The Basel Committee on Banking Supervision, the group of senior banking supervisors from North America, Europe and Japan that devised Basel II, recommends a two-stage implementation of the rules. Under this timetable, banks using the simpler and intermediate approaches to measuring their risks start from end-2006. Banks adopting advanced approaches start from end-2007.
Up to 120 countries have adopted the current, and simpler, Basel I capital adequacy rules that date from 1988.
(HKMA: www.info.gov.hk/hkma; "Basel II: Australia and Singapore Lead Asia-Pacific in Preparations": www.standardandpoors.com)
David Keefe (dkeefe@globalriskregulator.com)
