Asia resolution rules risk conflict with G-Sib home regulators

New recovery and resolution rules in Asia could bring global bank branches into conflict with their home regulators, unless more guidance is provided about what information banks need to include in their local recovery plans, global banks are warning.

"You could understand why they would ask about your strategy in Hong Kong – that would be very fair to ask – but they could also ask you about your global data, such as inter-affiliate trades or capital and liquidity. This might not be for us to share," says a regulation expert at a US bank active in Asia.

European and US banks already have to submit their recovery and resolution plans to home supervisors. Regulators in Asian jurisdictions are now drawing up new rules that will compel foreign banks that have a large presence on the host domestic market to indicate how they plan to wind-up their local operations should the need arise.

Hong Kong's framework bill on recovery and resolution was passed by the Legislative Council on June 22. Singapore released a consultation paper on a new recovery and resolution framework in April, but has not yet turned this into legislation. Other countries, such as Indonesia, are also looking at new laws in the area of recovery and resolution.

While banks declined to give any specific details of potential conflicts between host and home supervisors, one lawyer suggests it could be problematic if a cross-border bank is trying to negotiate particular aspects of its operation with its home regulator and a regulator from another jurisdiction wants to see details of this. Examples might include a large fine the bank has to pay, or the level and location of bail-in capital that it should set aside.

However, Mark Hyde, Hong Kong-based partner with Clifford Chance, says host regulators will need to see a certain amount of group-level information.

It comes down to regulators accepting that they can exchange information but on the premise it will be kept confidential, and on that basis things should cut both ways
Mark Hyde, Clifford Chance

"If you're looking at an international bank with a substantial presence here, ultimately in all probability the success or failure of the resolution of the institution is going to depend critically on the home plan rather than anything done at the direction of the Hong Kong authorities. So I can see the Hong Kong authorities would say: I want to see your plan top down rather than just see what you're doing here, because arguably that in isolation could be fairly meaningless," says Hyde.

This all hinges on a good level of implicit co-operation between the different regulators, he adds.

"It comes down to regulators accepting that they can exchange information but on the premise it will be kept confidential, and on that basis things should cut both ways," he says. "That co-operation cannot just be at the time at which the entity crashes, but must be at the point in time when institutions are preparing their plans."

However, he recognises somewhere like Hong Kong is unique, in that it is a host jurisdiction for many global systemically important banks (G-Sibs) but isn't a home jurisdiction for any of them.

Established dialogue

Sabine Bauer, a senior director at Fitch Ratings based in Hong Kong, says there is already a well-established dialogue between regulators that would prevent such conflicts happening.

"A regulator should be able to ask whatever it wants to ask, providing this is relevant to its own jurisdiction," she says. "For inter-connected banks, regulators in their key jurisdictions sit together regularly, so if one regulator has a concern, they can take it up during these meetings."

But the regulation expert in the US bank counters this by saying many of the smaller jurisdictions don't always feel able to speak up, "so they try to put pressure on banks to share these things".

In a report for the G20 heads of government in August, the Financial Stability Board noted that its emerging market regional consultative groups had raised specific concerns about information sharing on resolution, and especially the implications "for jurisdictions in their regions that host G-Sibs".

The concerns among global banks could be exacerbated because the legislation in Hong Kong and Singapore leaves ambiguity about whether resolution and recovery planning will be applied only to domestic systemically important banks (D-Sibs) or to all G-Sibs operating in the jurisdictions.

"The trend we have observed in Hong Kong and Singapore is slightly worrying," says a regulation expert at one European bank active in Asia. "If a bank is not systemically important for the domestic market, then you shouldn't have to prepare a local recovery and resolution plan, but these resolution laws seem to be introducing the requirement for other banks to conform through the backdoor."

While both the Hong Kong Monetary Authority (HKMA) and the Monetary Authority of Singapore (MAS) emphasise the need for banks with a systemic presence on the local market to supply a credible resolution and recovery plan, neither regulator makes it clear what should happen with smaller entities that are not so important.

Seeking clarification

Global banks are now calling on Asian regulators to clarify what data they are likely to require and to what extent these requirements will apply to G-Sib branches that are not classed as D-Sibs. There are signs that regulators in Hong Kong and Singapore may be prepared to take banks' concerns on board.

MAS says a number of respondents during its consultation raised concerns about how home-host co-operation would work in practice.

"MAS will cooperate closely with foreign supervisory and resolution authorities for cross-border crisis management and resolution planning [and] continue our close engagement with the home authorities in the normal course of supervision, during a crisis and in the event of the implementation of a global resolution strategy," the MAS said in a statement.

In an emailed statement to Risk.net, HKMA said: "For [foreign banks] operating in Hong Kong, the HKMA's general preference is to communicate and coordinate with the relevant home and host authorities, both during business as usual periods and in times of crisis... [We] will continue to work with overseas authorities on recovery and resolution planning matters for cross-border groups, including through [our] involvement as a member of a number of G-Sib Crisis Management Groups."

HKMA says the additional guidance it is finalising will also define the "core" information banks have to submit.

This article was fist pubished on Risk.net