Hong Kong SAR - HKMA reduces Regulatory Reserve requirement by 50% for locally incorporated AIs
Earlier this month, the HKMA issued a Circular to announce its decision to lower the regulatory reserve (“RR”) requirement on locally incorporated authorised institutions (“AIs”) by 50% with effect from 8 April 2020 in order to provide AIs with more headroom to support customers to cope with the Covid-19 outbreak.
The HKMA has observed that since the implementation of Hong Kong Financial Reporting Standard (“HKFRS 9”) in January 2018, local incorporated AIs have generally made good progress in their accounting provisions, with a notable increase for the second half of 2019 given the deterioration in the economic environment. The HKMA reports that this indicates that the “expected loss” provisioning requirement under HKFRS 9 is robust and responsive to changes in external conditions, and accordingly the need for locally incorporated AIs to maintain an RR on top of such provisions has diminished.
The HKMA strongly encourages AIs to utilise the additional lending headroom created by the RR release to support customers in light of the impact of COVID-19.
It is the HKMA’s expectation that the RR release should not be used for dividend distribution, share buyback or payment of bonus to senior management.
The HKMA maintains that it will keep the situation under regular review and will continue to assess future needs to adjust the implementation of HKFRS 9 and the RR requirements as per market requirements. The mechanism for calculating the reduction in the RR is set out in the Annex to the Circular.