OREANDA-NEWS. Hong Kong has passed legislation establishing a resolution regime for its financial institutions and banks are therefore likely to step up their work on recovery and resolutions plans, says Fitch Ratings. The new law closes the gap between Hong Kong's limited power to intervene in financial institutions and the Financial Stability Board's key attributes for effective resolution regimes. Hong Kong is one of the few Asian jurisdictions to have implemented resolution laws that specifically allow for bail-in, and we have excluded state support from bank ratings there since May 2015.

Cross-border resolution plans are particularly important because the bulk of banks operating in Hong Kong are owned by foreign groups and resolution of a foreign parent could have spill-over consequences for the Hong Kong subsidiary. We expect that local banks forming part of larger international groups, such as HSBC and Standard Chartered, will be able to draw on their group's resolution plans.

Foreign parents may position their subsidiaries for resolution by the Hong Kong host regulator and plan for external loss-absorbing capital issuance, while others may look for resolution at the parent level by the home regulator intending to upstream potential losses through issuing loss-absorbing capital to their parent.

Hong Kong's regime provides its authorities with flexibility to work with other resolution authorities in the resolution of a foreign-owned parent. But before recognising a foreign resolution action, the Hong Kong authorities have to consult with the Financial Secretary to ensure that resolution will not have an adverse impact on Hong Kong's financial stability. In addition, authorities will have to seek reassurance that continuity of critical financial services will be preserved at the Hong Kong bank and that its creditors and shareholders will not be disadvantaged or treated less favourably than in other jurisdictions. If Hong Kong's authorities cannot obtain reassurances, they will not agree with the group resolution plan.

The right to refuse recognition or enforcement of third-country resolution proceedings is not unusual; Article 95 of the EU's Bank Recovery and Resolution Directive, for example, covers this.

The Financial Institutions (Resolution) Ordinance, passed by Hong Kong's Legislative Council on 22 June, was published on 30 June. We expect the next step will be for the Hong Kong Monetary Authority (HKMA), the local bank regulator and one of the appointed resolution authorities, to provide guidance on resolution planning, resolvability assessments and formulate loss-absorbing capacity requirements.

We also expect the HKMA to publish comprehensive guidance on how they will determine the point of non-viability for banks. The law links non-viability to a breach of a financial company's authorisation and licensing criteria and also provides flexibility enabling resolution authorities to exercise judgement depending on prevailing circumstances.