Hong Kong Regulations

BANKING (CAPITAL) RULES - SECT 12

Exemption for exposures

(1) An authorized institution which uses the IRB approach to calculate its
credit risk for non-securitization exposures (referred to in
this section as "relevant calculation") may apply to the Monetary Authority to
have such of its non-securitization exposures as specified in the application
exempted from inclusion in the relevant calculation.

(2) Subject to subsection (4), the Monetary Authority shall determine an
application under subsection (1) from an authorized institution by—

   (a)  exempting from inclusion in the relevant calculation—

        (i)    the exposures in an IRB class (or, in the case of retail
               exposures, an IRB subclass) which are specified in the
               application; or

        (ii)   the exposures falling within a business unit which are
               specified in the application,
if the institution demonstrates to the satisfaction of the Monetary Authority
that—

        (iii)  it is not practicable for the institution to include the
               exposures referred to in subparagraph (i) or (ii), as the case
               may be, in the relevant calculation; and

        (iv)   the exemption will not materially prejudice the calculation of
               the institution's regulatory capital for credit risk; or

   (b)  refusing to grant the exemption.

(3) An authorized institution to which an exemption under subsection (2)(a) is
granted—

   (a)  subject to paragraph (b), shall use the STC approach to calculate its
        credit risk for non-securitization exposures to which the exemption
        relates; or

   (b)  may use, during the transitional period, the BSC approach to calculate
        its credit risk for non-securitization exposures to which the
        exemption relates if the institution has been granted approval under
        section 6(2)(a) to use the BSC approach to calculate its credit risk
        for non-securitization exposures on the ground specified in
        section 7(b).

(4) The Monetary Authority shall not grant an exemption under subsection
(2)(a) to an authorized institution unless the institution demonstrates to the
satisfaction of the Monetary Authority that, if the exemption were granted—

   (a)  the aggregate risk-weighted amount of—

        (i)    the non-securitization exposures to which the exemption would
               relate; and

        (ii)   the securitization exposures which would be subject to the
               STC(S) approach in consequence of the exemption,
would not cause the institution to fail to comply with the IRB  coverage ratio
applicable to the institution under section 11(1);

   (b)  if subsection (2)(a)(i) is applicable—

        (i)    in the case of non-securitization exposures which are not
               equity exposures, the aggregate risk-weighted amount of the
               institution's exposures in an IRB class (or, in the case of
               retail exposures, an IRB  subclass) to which the exemption
               would relate would not exceed 10% of the institution's
               risk-weighted amount for credit risk;

        (ii)   in the case of non-securitization exposures which are equity
               exposures— (A) subject to sub-subparagraph (B), the average
               aggregate EAD over the past 12 months (being the 12 months
               immediately preceding the date on which the institution applies
               to the Monetary Authority for the exemption) of the
               institution's equity exposures to which the exemption would
               relate would not exceed 10% of the institution's capital base
               as determined in accordance with Part 3; (B) if the
               institution's equity exposures consist of less than 10
               individual holdings, the average aggregate EAD over the past 12
               months

(being the 12 months immediately preceding the date on which the institution
applies to the Monetary Authority for the exemption) of the institution's
equity exposures to which the exemption would relate would not exceed 5% of
the institution's capital base as determined in accordance with Part 3.

(5) Where—

   (a)  an authorized institution is granted an exemption (referred to
in this subsection as "existing exemption") under subsection (2)(a); and

   (b)  the institution is at any time thereafter satisfied that if it were to
        make a fresh application under subsection (1) for an exemption

        (referred to in this subsection as "new exemption") in respect of the 
exposures to which the existing exemption relates, the new exemption would be,
or may be, refused by virtue of subsection (2) or (4), the institution shall,
as soon as is practicable after it is so satisfied, give notice in writing to
the Monetary Authority of the case.