(Repeat for additional subscribers)
Jan 13 (The following statement was released by the rating agency)
Hong Kong's 7 January consultation paper tries to establish a more effective resolution regime which could help the city meet emerging global standards to support group-wide bank resolutions, says Fitch Ratings. This would be keeping in line with guidelines set forth by the members of the Financial Stability Board (FSB). Many FSB members are seeking to enhance their powers when they deem a bank to be non-viable, and to overwrite creditors' contractual rights through intervention via transferring operations to other banks or bridge banks and establishment of bail-in procedures.
Hong Kong's outline of its resolution regime reflects the efforts of the Hong Kong Monetary Authority (HKMA) to ensure efficient cross-border coordination amongst bank regulators, as Hong Kong is host country to nearly all global systemically important banks. It indicates that HKMA has no intention to set higher regulatory hurdles or ringfence the local operations of international banks, acknowledging that it could be detrimental to its status as a financial centre.
It is not surprising that Hong Kong is leading the region on this issue. Unlike other-Asia Pacific markets, Hong Kong's main banks are foreign-owned, and so its own regime needs to reflect developments in the parent banks' home market. Entering into a formal consultation process makes it more explicit that HKMA's' propensity of providing extraordinary state support is going to decline. This has no impact on banks' Issuer Default Ratings, as none are based on sovereign support from the Hong Kong authorities. However, it is likely to lead to downward pressure on banks' Support Rating Floors, which Fitch maintains at 'A-' for the large banks and at 'BB+' for the smaller banks.
Fitch considers it likely that HKMA will apply the sought-for extended powers to facilitate resolution of large and complex banks, in particular if those are undergoing resolution by their home regulators. The proposed scope of the regime is broad, with the aim of retaining flexibility, to be able to accommodate banks from markets that have both well-advanced resolution regimes and those that are at the very early stages of considering resolution regimes such as China. The distinction between the credit risk of legacy instruments and new-style capital instruments could start to blur, as the resolution is likely to be triggered at the point-of-non-viability. Current proposals do not indicate that legacy instruments will be excluded from its scope. Fitch rates subordinated legacy bonds at the same level as new-style Basel III bonds with partial write-down features. We expect banks to continue efforts to issue new-style Basel III capital instruments, which will provide a cushion to senior bondholders.
A second-stage consultation process will be held later this year, at which time greater details of the resolution regime will emerge. Subject to the outcome of the consultation process, the draft resolution regime bill will be submitted to Hong Kong's Legislative Council in 2015.