Hong Kong banks to get less government support over the next 12-18 months

The government is implementing a revised bank resolution regime.

The goal of the government's revised bank resolution is to reduce the public cost of bank resolution through burden sharing.

The Hong Kong government enacted the Financial Institutions (Resolution) Ordinance in July 2017. According to Moody's, the Hong Kong bank resolution authority, the HKMA, is vested with broad new bank resolution powers, including the ability to bail-in liabilities, suspend the termination right of derivative counterparties, and transfer bank assets and liabilities to third parties, a bridge institution or a temporary public ownership company.

Hong Kong’s revised resolution regime is largely in line with the Financial Stability Board’s “Key Attributes of Effective Bank Resolution Regimes for Financial Institutions”.

Here's more from Moody's:

We will evaluate Hong Kong's resolution regime and consider whether there is a reasonable degree of clarity of the impact of a bank failure on depositors and other creditors. If we consider Hong Kong to have an operational resolution regime, we will likely introduce the Advanced Loss Given Failure framework to analyze banks' liabilities, and distinguish loss severity of each individual creditor class upon resolution.

The Hong Kong government is evaluating whether to introduce total loss-absorbing capacity (TLAC) requirements for Hong Kong banks. To the extent larger Hong Kong banks are subject to TLAC requirement and need to build up their loss-absorbing capital buffer over time, it should facilitate future orderly resolutions of larger banks without recourse to the public purse.

We would expect to lower our support assumption for the five largest Hong Kong banks that are designated as domestic systemically important banks whose rating incorporate support from the Hong Kong government.