Hong Kong Monetary Authority updates risk-based supervisory approach on emerging risks

On 23 December 2022, the Hong Kong Monetary Authority (HKMA) published an update of SA-1 “Risk-based Supervisory Approach” module of the Supervisory Policy Manual (SPM) to set out how the HKMA will supervise emerging risks.

Over the past two years, the HKMA has been active in explaining how Authorised Institutions (AIs) should approach climate risk, both with the launch of a new SPM module on how AIs should create a climate risk framework, and then in June 2022 with the publication of the details on the HKMA’s two-year plan to integrate climate risk into its banking supervisory processes.

With this updated Module, the HKMA clarifies that it expects AIs to consider any emerging risks in the assessment of the eight inherent risks and uses the example of climate risk as a guide to how this can be done. The primacy of the main risks is therefore underlined, however the amendments provide an explanation of how AIs should be approaching an emerging risk to incorporate it into the overall framework in preparation for the future. While the current emerging risk focus is on climate risk, the HKMA has advised AIs that they should not overlook other risks brought by other environmental and sustainability related issues, for example, biodiversity loss (for further information on the outcome of the United Nations Conference on Biological Diversity (COP15) held in December 2022 see here). With the continued pace of developments on the “E” in ESG in particular, AIs should be prepared for further emerging risks.

In terms of changes to the text of the Module, they are minimal and focused on the emerging risks issue with new paragraphs 1.5.5 and 2.9. The new Module is now in force.

In addition, on 12 January 2023, the HKMA issued a circular alerting banks in Hong Kong to the recent Basel Committee on Banking Supervision responses clarifying how climate-related financial risks may be captured in the existing Basel Framework. The HKMA will be incorporating these responses into its own supervisory framework so banks should be referring to them in relation to their own climate risk assessment.