Vol 12 (2015) - Issue 2

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Commentaries on the Second Consultation Paper about the Proposed Resolution Regime for Financial Institutions in Hong Kong

On 21 January 2015 the Financial Services and the Treasury Bureau, the Hong Kong Monetary Authority, the Securities and Futures Commission and the Insurance Authority ('the Authorities'), jointly published the Second Consultation Paper ('CP2') on An Effective Resolution Regime for Financial Institutions in Hong Kong. CP2 presents conclusions from the responses to the First Consultation Paper ('CP1') issued on 14 January 2014 and provides further details in regard to certain proposals and issues raised by the proposed resolution regime set out in CP1 and which the Authorities consider '[t]o be central to the establishment of such a regime.' In particular, CP2 provides a summary of responses to the issues raised in CP1, as well as further, but by no means comprehensive, information on the proposed bail-in resolution option. The object of this editorial piece is to 'pick up' from, if not, add to the earlier article published in the previous issue by Ludmilla Robinson and Angus Young.
Relevant aspects of the bail-in proposal are contained in Chapter 3 Resolution Powers of CP2, which addresses the objectives and execution process for a bail-in, and Chapter 4 Safeguards and Funding, which discusses the how one of the regime objectives, No Creditor Worse Off than in Liquidation ('NCWOL'), can be realised. This Chapter also sets out the general procedure whereby shareholder and creditor interests will be valued so as to meet the NCWOL requirement. The proposals set out in these two chapters are discussed below.
CP2 reiterates the objectives of a bail-in from CP1, by stating that a: '[s]tatutory bail-in seeks to ensure that shareholders and creditors of the FI [Financial Institution], rather than public funds, absorb any losses incurred and meet the costs of recapitalisation so that the FI can continue to provide critical financial services to its customers.'
The interests of both shareholders and creditors will be subject to write down to the '[e]xtent needed to absorb losses and recapitalise the FI to a level capable of restoring market confidence.' This reasons for doing so is avoid a 'meltdown' of Hong Kong's financial system triggered by the collapse of major financial institutions in the territory.