Hong Kong banking watchdog seeks bail-in powers

January 7, 2014 1:52 pm

Hong Kong banking watchdog seeks bail-in powers

By Paul J Davies in Hong Kong

Hong Kong’s banking regulator has demanded far-reaching powers to prop up or shut down failing banks, such as the ability to suspend normal creditor rights, as it plays catch-up with western regulators trying prevent a future Lehman Brothers.The Hong Kong Monetary Authority made the calls in the first public consultation from an Asian regulator on a so-called resolution and recovery regime, which is meant to make financial institutions easier to break up and sell off in a crisis.

Lawyers said its proposals and their progress would be closely watched by other regulators around the region who have yet to act.

Much of Asia was left relatively unscathed by the 2008 crisis, but local regulators are still expected to follow the demands of the Financial Stability Board, which is co-ordinating global regulatory changes.

Hong Kong as a small, but highly internationalised finance market is particularly concerned about its ability to preserve local stability and protect consumer deposits in the future.

The regulator signalled that it would push for legislation allowing it to “bail in” bank bondholders and lenders, by enforcing writedowns on the value of bank debt or converting it to equity.

“The consultation paper is clear that bail-in and other powers will be needed and that these will be sought in new legislation next year,” said Royce Miller, a partner at Freshfields in Hong Kong.

“Even though Hong Kong regulators are waiting for greater global consensus on bail-in and some other issues, it is clear that they won’t wait much longer and that they are aiming to make decisions on these issues during 2014.”

Bail-in powers over senior bonds have proved controversial elsewhere, with investors and analysts in other markets saying they could increase the costs to banks and affect their access to senior funding. The UK, US and Switzerland have all indicated they will use bail-in powers.

To underline its international role and exposure, the HKMA noted that 26 out of the 29 banks named by the FSB as global systemically important financial institutions operate in Hong Kong.

“Hong Kong’s existing statutory framework does not provide for all of the powers that the FSB considers necessary for an effective resolution regime,” the HKMA said.

New legislation is needed to let regulators carry out an orderly resolution of a failing financial institution without severe systemic disruption while protecting taxpayers in Hong Kong, it added.

The HKMA prefers a so-called single point of entry regime, which allows regulators to co-ordinate the resolution of large global groups through a single holding company – and leads to power to bail in holding company bonds if needed.

However, it said while this regime was necessary to ensure the HKMA could in effect support another regulator in the resolution of a global bank, it would only use it when it was certain that a global resolution would protect local depositors, investors and taxpayers.

“As a jurisdiction, Hong Kong poses specific challenges in that it is the headquarters jurisdiction of some very large financial institutions – while also being a host jurisdiction to many global financial firms,” Mr Miller added. “The combination of the two groups in this quantity is unlike most other financial centres.”

The consultation will close in April and the HKMA said it might return to the market with some final specific questions later in the year ahead of legislation in 2015.