HKMA updates rules for banks’ equity investments in funds

The HKMA (Hong Kong Monetary Authority) is consulting on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel III standards on capital requirements for banks' equity investments in funds in Hong Kong.

The Basel III standard sets out three approaches to the treatment of equity investments in funds that are held in the banking book, which vary in their risk sensitivity and conservatism: the "look-through approach" (LTA), the "mandate-based approach" (MBA), and the "fallback approach" (FBA).

The LTA requires a banking entity to determine the risk-weight of its fund investment as if the banking entity held the fund's assets directly. This is the most granular and risk-sensitive approach. The second approach, the MBA, provides a method for calculating regulatory capital that can be used when the conditions for applying the LTA are not met. Where neither the LTA nor the MBA is feasible, banks are required to apply the FBA. The FBA applies a 1,250% risk weight to the bank's equity investment in the fund.

Subject to the outcome of the consultation and the subsequent legislative process for rule-making, the HKMA is aiming to implement the above standard sometime by the end of 2021.