HKMA rules out Basel II AMA approach

Banks operating in the Special Administrative Region will instead be limited to using the standardised and basic indicator approaches to operational risk in the initial stages, and will be encouraged to focus on the management of op risk rather than the calculation of an operational risk capital charge, said Simon Topping, executive director, banking policy, at the HKMA.

"It's the only thing in Basel II we're not going to allow initially, because we don't believe building up elaborate systems for operational risk is helping banks manage risk too much," he said. "We are expecting banks to focus their dollars on managing op risk, thus implementing the Basel Committee's paper on sound practices on the management of operational risk, rather than building up systems to calculate an AMA capital charge."

The ruling out of the AMA approaches is part of the HKMA's draft guidelines on Basel II implementation, expected to be released publicly within weeks. The formulation of domestic guidelines follows the finalisation of the Basel II framework at the end of June.

Preparations begin

In an exclusive interview with Asia Risk magazine, a sister publication of FX Week, Topping said the publication of national guidelines will allow banks operating in the territory to begin preparations for Basel II in earnest. "This will help because everyone has been searching for concrete information on what our qualifying criteria are going to be, and we couldn't really finalise that until we saw what was in Basel II," said Topping. "We have taken a fairly pragmatic approach and we've tried to be as mainstream as we can, but at the same time take account of the particular characteristics in Hong Kong."

The 124-page draft document will describe the HKMA's qualifying criteria for banks aiming to implement the internal ratings-based (IRB) approaches for credit risk, outline the minimum requirements for IRB banks, provide loss-given default and exposure-at-default parameters, and detail how the regulator will treat the various items of national discretion.

The territory's nine largest locally incorporated banks are currently aiming to apply one of the two IRB approaches, covering 75-80% of the territory's banking assets, said Topping. As part of the transition to Basel II, Hong Kong's banks will be expected to submit their implementation plans to the HKMA by the end of this year, with Basel II coming into force at the end of 2006. However, in a change to the Basel II framework, the HKMA will allow those banks aiming for IRB to have a transition period of three years.

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