Management Summary
- Purpose / Background: This document (VIR-1) provides regulatory guidance on the HKMA’s approach to "Valuation in Resolution" (VIR) under the Financial Institutions (Resolution) Ordinance (FIRO). It establishes the framework for valuations required before and after resolution to ensure transparency, fairness, and the "No Creditor Worse Off" (NCWOL) safeguard.
- One-line conclusion: AIs must develop robust, business-as-usual (BAU) data and modeling capabilities to support rapid, iterative valuations (Valuations 1, 2, and 3) during a crisis.
- Key Changes:
- Formalization of a three-tier valuation framework (V1: Failure/Viability, V2: Resolution Transaction, V3: NCWOL).
- Requirement to maintain capabilities for generating initial Valuation 1 outputs within 7 days and Valuation 2 within 12 days of an HKMA request.
- Strict independence requirements for "Section 10 entities" (assistants for V1/V2) and "Independent Valuers" (for V3).
- Shift to iterative valuation processes rather than static, point-in-time assessments.
- Requirement for AIs to maintain "data rooms" and provide model access to external valuers.
- Key Dates / Deadlines: Effective date 24 July 2026. AIs are expected to maintain capabilities as part of their ongoing resolution planning obligations.
- Applicability / Impact scope: All Authorized Institutions (AIs) in Hong Kong, their holding companies, and affiliated operational entities subject to FIRO.
- Recommended management actions:
- Evaluate current MIS and data infrastructure to ensure balance sheet data can be aggregated on a T+7/T+12 cycle.
- Formalize internal governance for model validation and "re-performance testing" to support external auditors/valuers.
- Develop and maintain a "resolution data room" protocol for rapid deployment during contingency planning.
- Conduct gap analysis between current financial reporting and resolution-specific valuation requirements (e.g., economic value vs. accounting value).
- Review internal policies to ensure no conflicts of interest exist for potential third-party valuation support.
Detailed Summary
1) Document overview
Provides guidance on the HKMA’s approach to VIR under FIRO. It mandates three types of valuations to inform resolution decision-making and compensation eligibility. It applies to all AIs, their holding companies, and affiliated operational entities.
2) Main requirements
- Valuation 1 (Failing/Likely to Fail): Informs if an AI is non-viable and whether conditions for resolution initiation are met.
- Valuation 2 (Resolution Transaction): Informs the choice and execution of stabilization options (e.g., bail-in, transfer).
- Valuation 3 (NCWOL): Performed post-resolution by an independent valuer to determine if creditors/shareholders are entitled to compensation.
- Methodology: Valuations must be "fair, prudent, and realistic." They must ignore government support and reflect actual market conditions, including potential distressed bargaining positions.
3) Key changes (vs previous requirements)
- Increased emphasis on "iterative" valuation workflows, moving away from monolithic reports to dynamic, updated views as the crisis evolves.
- Explicit requirement for AIs to provide access to internal models and facilitate "re-performance testing" by the appointed valuer.
- Introduction of standardized turnaround targets (T+7 for V1, T+12 for V2).
4) Important dates & transition
- Effective date: 24 July 2026. AIs should treat these capabilities as ongoing compliance requirements within their resolution planning framework.
5) Impact and risks
- Operations: High pressure on finance and risk teams to produce rapid, high-quality data under stress.
- IT/Data: Requirement for granular, up-to-date balance sheet data; systems must be capable of intraday adjustments for volatile assets.
- Compliance: Risk of failing the NCWOL safeguard if data accuracy is insufficient, potentially leading to compensation disputes and legal challenges.
6) Compliance action checklist
- Integrate VIR capabilities into the BAU resolution planning cycle (ref. RA-2 and VIR-2).
- Establish protocols for "Section 10 entity" engagement, including conflict-of-interest screening.
- Map all material intra-group dependencies to support NCWOL counterfactual modeling.
- Document and test the "data room" mechanism for secure, rapid information sharing with the HKMA and appointed valuers.
7) Appendices/attachments summary
- Figure 1 (Valuations to inform decisions): A matrix defining the basis (accounting/economic/counterfactual), key output, and purpose of the three valuations.
- Figure 2 (Timeline for VIR): A chronological overview mapping the valuation process from contingency planning through resolution to the final NCWOL report.