The Hong Kong government has initiated a consultation process that can resolve the problems faced by the non-viable financial institutions effectively without disturbing the financial system.
Authorized institutions, financial market infrastructures, licensed corporations, including insurance companies will be covered under these proposals, as per a consultation paper jointly published by the Financial Services and the Treasury Bureau, the Hong Kong Monetary Authority, the Securities and Futures Commission, and the Insurance Authority.
Each of the regulators, namely the HKMA, the SFC and the Insurance Authority is proposed as a designated authority to exercise their powers in such a manner that the financial stability is restored and even the taxpayers money is protected.
These authorities can use various options to resolve the financial crisis faced by an institution, which may include transfer of full or partial ownership to other entity, temporary use of bridge institution, or a bail-out, and may also consider temporary public ownership of the troubled FI, as a last resort.
The government aims to “better” protect a broad set of stakeholders, including depositors, investors and policyholders and may also secure continuity of cover for some or all insurance policyholders, through these proposals.
The paper noted the insurance sector in Hong Kong is “relatively sizeable and diverse”, and highlighted the risks prevalent in view of many global insurance companies operating in the region.
The report said: "It appears that few insurers operating here do so with sufficient scale and complexity to be critical or pose wider systemic risk locally on failure. Nevertheless, some individual insurers may pose such risks locally and a number of internationally and globally active insurers have operations in Hong Kong also.”
The paper also proposes remedies in case a cross-border FI becomes non-viable by ensuring all home and key host jurisdictions adopt "enhanced” coordination and cooperation.
"It is important that, Hong Kong, as a major international finance centre which hosts the operations of a large number of systemically important cross-border FIs secures the necessary powers to support cross-border resolution,” the paper said.
The Hong Kong government has made these proposals in view of the international standards set out by the Financial Stability Board (FSB) in 2011, in the aftermath of the global financial crisis of 2008 that resulted in central banks bailing out the so called “too-big-to-fail” institutions.
As an international finance centre and FSB member jurisdiction, Hong Kong is expected to meet the standards set out by the FSB’s by the 2015-end deadline.
The 141-page report titled “An Effective Resolution Regime for Financial Institutions in Hong Kong”, is open for first round of consultation until April 6, following which there will be a second stage consultation. The government aims to introduce the legislative proposals into the Legislative Committee during 2015, so as to meet the FSB deadline.