Transfer of General Insurance Business of The Hong Kong Mortgage Corporation Limited

Banking Policy Department
Our Ref: B1/15C
B9/25/2C
B9/25/4C
16 March 2018
The Chief Executive
All Authorized Institutions
Dear Sir/Madam,
Transfer of General Insurance Business of The Hong Kong Mortgage Corporation Limited As you may be aware, The Hong Kong Mortgage Corporation Limited (“HKMC”) is planning to transfer its general insurance business (“GI business”) to its wholly-owned subsidiary, HKMC Insurance Limited (“HKMCI”)1 . After the transfer, the HKMCI will replace the HKMC as the insurer or guarantor under the Mortgage Insurance Programme (“MIP”), Reverse Mortgage Programme, Premium Loan Insurance Scheme and SME Financing Guarantee Scheme (collectively referred to as “Programmes”), as the case may be. In addition, the performance of all the HKMCI’s liabilities and obligations under the Programmes to its counterparties will be guaranteed by a standing parental guarantee issued by the HKMC (“HKMC Guarantee”). I am writing to set out the relevant supervisory treatments for the credit exposures insured or guaranteed by the HKMCI under the Programmes after the transfer. Capital adequacy The HKMA is processing the HKMCI’s application to become a domestic public sector entity (“DPSE”) for the purposes of the Banking (Capital) Rules (“BCR”). It is currently expected that the legislative process for the necessary amendment to the BCR will be completed by the end of 2018 at the earliest. During the period after the transfer of the GI business and before the proposed amendment to the BCR comes into effect, authorized institutions (“AIs”) may 1 Subject to the approval of the transfer by the Insurance Authority, it is proposed that the transfer shall take effect on 1 May 2018 (see S. No.6 to Gazette No. 8/2018).

determine the capital requirements of their credit exposures covered by the Programmes (other than the 80% Guarantee Scheme discussed below) in accordance with the treatments set out in Annex 1 of this letter provided that (i) the HKMC Guarantee meets all the criteria set out in section 98, 132, 211 or 212 of the BCR, as the case requires; (ii) the AIs have not breached any of their obligations under the Programmes’ master insurance policies or master guarantees, as the case may be; and (iii) the HKMCI is wholly-owned by the HKMC at the time the capital requirements are determined. Special concessionary measure of the Government under the SME Financing Guarantee Scheme Since 2012, the Government has been providing a guarantee for 80% of loans granted by AIs to SMEs under the SME Financing Guarantee Scheme (“80% Guarantee Scheme”). We understand that the role of the HKMC under the 80% Guarantee Scheme will likewise be taken over by the HKMCI after the business transfer. In this regard, the Government has issued a letter of comfort to the HKMA confirming its continuous commitment to the 80% Guarantee Scheme and the various obligations to the HKMCI under the Scheme. It follows therefore that the capital treatments for the 80% Guarantee Scheme set out in the circular of 27 June 20122 issued by the HKMA will continue to apply after the transfer of the GI business (see Annex 1 for more details). Similarly, the portion of any loan to an SME which is covered by the guarantee provided by the HKMCI under the 80% Guarantee Scheme will receive the same treatment as set out in the HKMA’s circular of 15 July 20163 for the purposes of paragraph
3.2.4 of the SPM module CR-G-7 “Collateral and Guarantees”.
Large exposures to a single counterparty Currently, exposures to the HKMC under the MIP and 80% Guarantee Scheme are exempt from the limit on large exposure of AIs under section 81 of the Banking Ordinance (“BO”). The HKMA will initiate legislative amendments to section 81 of the BO, and is considering providing the same exemption to the MIP put under the HKMCI as
part of the legal amendments. It is anticipated that such legislative changes
may only take effect by 2019 at the earliest. In the interim period after the MIP is transferred to the HKMCI but before the legal amendments take effect, during 2 Exposure to HKMC: 80% Loan Guarantee Product under SME Financing Guarantee Scheme (27 June 2012) (http://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2012/20120627e1.pdf) 3 Exposure to HKMC: 80% Loan Guarantee Product under SME Financing Guarantee Scheme (15 July 2016) (http://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2016/20160715e1.pdf)

which exposures to HKMCI under the MIP are not exempted when checking for compliance with section 81 of the BO, if an AI’s exposures to the HKMC group are expected to exceed the statutory limit under section 81 of the BO, it is advised to approach its usual supervisory contact at the HKMA in advance and the HKMA will be prepared to grant an interim exemption to the institution’s MIP exposures, based on the HKMC Guarantee. Please note that the letter of comfort referred to above from the Government is acceptable for the purposes of section 81(6)(b)(ii) of the BO in respect of AIs’ financial exposure to the HKMCI arising from the provision of the guarantee by the HKMCI under the 80% Guarantee Scheme. Such exposure can therefore be excluded from the calculation of the 25% limit under section 81(1) of the BO. If you have any questions on this letter, please feel free to contact your usual contact at the HKMA for assistance. Yours faithfully, Daryl Ho Executive Director (Banking Policy) Encl cc: The Chairperson, The Hong Kong Association of Banks The Chairman, The DTC Association FSTB (Attn: Ms Eureka Cheung)

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Annex 1: Capital treatments for exposures covered by the Programmes after the transfer of the GI business
1. The STC approach
Programmes Capital treatments Return of Capital Adequacy Ratio (MA(BS)3)
1. Mortgage Insurance
Programme
2. Reverse Mortgage
Programme
3. Premium Loan
Insurance Scheme
4. SME Financing
Guarantee Scheme
(other than the 80%
Guarantee Scheme supported by the
Government’s commitment)
The portion of a loan granted by an AI insured or guaranteed by the HKMCI can be regarded as a credit exposure to the HKMCI (“deemed exposure”) covered by the HKMC guarantee. The credit risk mitigation (“CRM”) effect of the HKMC guarantee is taken into account in the calculation of the risk-weighted amount of the deemed exposure by substituting the risk-weight applicable to the HKMC for the risk-weight applicable to the HKMCI and in accordance with the provisions of the BCR relating to recognized guarantee. The portion of the loan that is not insured or guaranteed by the HKMCI should be assigned the risk-weight applicable to the exposure class to which the loan belongs. In Part IIIb Division A:
(i) the whole principal amount of the loan will be reported in the column “Principal Amount” under the exposure class to which the loan belongs (e.g. residential mortgage loan) (despite the fact that part of the loan is regarded as a credit exposure to the HKMCI (i.e. corporate exposure) for the purposes of the application of the BCR). In other words, there is no need to split the principal amount into two different exposure classes (e.g. Class VI (Corporate Exposures) for the deemed exposure and Class X (Residential Mortgage Loans) for the portion that is not covered by the HKMCI’s mortgage insurance);

Programmes Capital treatments Return of Capital Adequacy Ratio (MA(BS)3) (ii) the CRM effect of the HKMC guarantee on the deemed exposure will be reflected in the Return by reporting the credit protection covered portion of the deemed exposure in the column “Principal Amount after CRM” under Class II item 4 (Domestic PSEs) and in the row for the risk-weight applicable to the HKMC; and (iii) the portion of the loan that is not covered by the HKMCI’s insurance or guarantee, if any, will be reported in the column “Principal Amount after CRM” under the exposure class to which the loan belongs. (Note: Recognizing that the capital treatments, which are transitional in nature, will affect only about 3 position dates (end-June, end-September and end-December) and there is essentially no change in the credit risk to which AIs are exposed, the HKMA is inclined to keep the reporting arrangements unchanged in order to preserve comparability of data across different position dates and to avoid distortion of the risk

Programmes Capital treatments Return of Capital Adequacy Ratio (MA(BS)3) profile of an AI’s credit portfolio due to significant changes in the amounts reported in certain exposure classes (e.g. Class VI (Corporate Exposures) and Class X (Residential Mortgage Loans))).
5. 80% Guarantee Scheme
supported by the
Government’s commitment
The capital treatments and the conditions set out in the circular of 27 June 2012 continue to apply. However, the references to “HKMC” should be construed as references to “HKMCI” and, to reflect the current drafting of the Banking (Capital) Rules, the reference to “subsections 100(9)(c) to (f)” should be construed as a reference to subsections 100(9)(a) to (d) and the reference to “subsection 100(9)(f)” should be construed as a reference to subsection 100(9)(d). No adjustment to the reporting arrangement is required.
2. The BSC approach
Programmes Capital treatments Return of Capital Adequacy Ratio (MA(BS)3)

1. Mortgage Insurance
   Programme
   Same principle as that underlying the treatments set out above for the STC approach applies. In Part IIIa Division A–

Programmes Capital treatments Return of Capital Adequacy Ratio (MA(BS)3)
2. Reverse Mortgage
Programme
3. Premium Loan
Insurance Scheme
4. SME Financing
Guarantee Scheme
(other than the 80%
Guarantee Scheme supported by the
Government’s commitment)
(i) since the deemed exposure will be fully covered by the HKMC guarantee, the credit protection uncovered portion of the deemed exposure should be zero. The credit protection covered portion of the deemed exposure will be reported in the column “Principal Amount” under Class II item 13 (Exposures to PSEs of Tier 1 countries); and (ii) the portion of the loan that is not covered by the HKMCI’s insurance or guarantee, if any, will be reported in the column “Principal Amount” under the exposure class to which the loan belongs.
5. 80% Guarantee Product
supported by the
Government’s commitment
The capital treatments and the conditions set out in the circular of 27 June 2012 apply to AIs using the BSC approach as they apply to AIs using the STC approach. However, the references to “HKMC” should be construed as references to “HKMCI”, the reference to “subsections 100(9)(c) to (f)” should be construed as a reference to subsections 134(6)(a) to (d) and the reference to “subsection 100(9)(f)” should be construed as a reference No adjustment to the reporting arrangement is required.

Programmes Capital treatments Return of Capital Adequacy Ratio (MA(BS)3) to subsection 134(6)(d).
3. The IRB approach
Programmes 1 Capital treatments Return of Capital Adequacy Ratio (MA(BS)3)

1. Mortgage Insurance
   Programme
2. Premium Loan
   Insurance Scheme
3. SME Financing
   Guarantee Scheme
   (other than the 80%
   Guarantee Scheme supported by the
   Government’s commitment)
   The same principle as that underlying the treatments set out above for the STC approach applies but in the context of the CRM treatment for recognized guarantees under Part 6 of the BCR. As this is a transitional treatment and there is in essence no change in the credit risk profiles of AIs arising from their exposures covered by the Programmes, no adjustment to the existing reporting arrangement is proposed with a view to avoid undue reporting burdens on AIs.
4. 80% Guarantee Product
   supported by the
   Government’s
   The capital treatments and the conditions set out in the circular of 27 June 2012 apply to AIs using the IRB approach as they apply to AIs using the STC approach. No adjustment to the reporting arrangement is required.

1 As stated in the HKMA circular of 17 June 2011, AIs are not allowed to use the IRB approach for their RMLs exposures under the HKMC’s Reverse Mortgage Programme.

Programmes 1 Capital treatments Return of Capital Adequacy Ratio (MA(BS)3) commitment However, the references to “HKMC” should be construed as references to “HKMCI”; the references to “section 100(9)” should be construed as references to section 216(3A) or 217(4), as the case requires; the reference to “subsections 100(9)(c) to (f)” should be construed as a reference to subsections 216(3A)(a) to (d) or 217(4)(a) to (d), as the case requires; and the reference to “subsection 100(9)(f)” should be construed as a reference to subsection 216(3A)(d) or 217(4)(d), as the case requires.