Hong Kong implements first phase of Basel III

Hong Kong has published the Banking Capital Amendment Rules 2012.

The rules  detail revised capital requirements for locally-incorporated authorized financial institutions.

The publication of the rules in the Hong Kong Government Gazette on October 19 implements the first phase of the Basel III, a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010-11.

Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. It was developed in response to the deficiencies in financial regulation revealed by the late 2000s financial crisis.

The government also gazetted a Commencement Notice on October 19 to bring into operation certain provisions of the Banking (Amendment) Ordinance 2012 on January 1, 2013 that are necessary for the implementation of the new Basel III capital framework.

Under the revised framework for the determination of the regulatory capital base, a bank needs to maintain three capital ratios calculated as a percentage of its risk-weighted assets: a Common Equity Tier 1 capital ratio of at least 4.5% and a Tier 1 capital ratio of at least 6% (both to be phased in from January 1, 2013, to January 1, 2015), and a total capital ratio of at least 8% from January 1, 2013.

The government said the implementation of Basel III will enhance the resilience of Hong Kong's banks and banking system, underpinning Hong Kong's status as a major international banking and financial centre.

The Hong Kong Monetary Authority noted that local authorized institutions are generally well capitalized with an average capital adequacy ratio of 15.9% as at end June 2012 and should be relatively well placed to meet the new requirements.

“We have consulted the banking industry widely before adopting this first phase of the Basel III capital standards and will continue to consult the industry as we roll out the subsequent phases of the Basel III package."

The Legislative Council enacted the Banking (Amendment) Ordinance 2012 in February 2012 to provide the legal framework for implementation in Hong Kong of the Basel III regulatory capital, liquidity and disclosure standards promulgated by the Basel Committee on Banking Supervision.