Hong Kong's bail-in system is most advanced in APAC

Its new bank resolution regime was only introduced in July.

Hong Kong’s bail-in system and bank resolutions are among the most advanced in the Asia-Pacific region as prescribed under Financial Stability Board’s (FSB) framework, according to an in-depth report from Moody’s Investors Service.

The report noted that Hong Kong has made the most significant advance by introducing a bank resolution regime in July 2017.

Under the resolution, authorities in Hong Kong have the power to bail in senior creditors and depositors unlike in most APAC territories where banks continue to favor traditional tools like preemptive government support to resolve bank distress.

Hong Kong authorities can also declare a bank non-viable and impose losses on different classes of creditors.

Before the enactment of the revised resolution, bank creditors, except for point of non-viability (PONV) subordinated debt creditors and shareholders, would bear losses only in the event of bank liquidation.

Hong Kong’s bail-in system also satisfies key attributes set by FSB including power to transfer or sell assets and liabilities, power to establish a temporary bridge institution, power to write down and convert liabilities, power to impose temporary stay on early termination rights, recovery and resolution planning for systemic firms, resolution powers in relation to holding companies, and power to require changes to firms’ structure and operations to improve resolvability.

The report also noted that Asia-Pacific banks still prefer bailouts to bail-ins with the few exceptions of Singapore who is close to full compliance and Japan who can bail in TLAC bondholders. 

Legislation is currently in the pipeline to speed up compliance in Australia, India, Korea while Thailand and China are also taking up initiatives to reform their bank resolutions.

Meanwhile, there is little progress in bank resolution regimes to Indonesia, Taiwan, Philippines and Malaysia since 2014.