11 - Resolution Regimes and Systemically Important Banks

Summary

Prior to the 2008–9 global financial crisis, regulatory and supervisory frameworks were not designed to manage the orderly failure of systemically important financial institutions. Governments were compelled to bail out these institutions to mitigate a deeper financial and economic crisis from developing. In response, the Financial Stability Board formulated an internationally endorsed financial institution resolution framework. The regulatory attributes of the Hong Kong Monetary Authority strengthen its role as the lead resolution authority in the banking sector. This chapter argues that supervisory gaps and underlap undermine the effectiveness of the resolution regime and the Hong Kong Monetary Authority acting as a resolution authority. Cross-border resolutions pivot on coordination and intent between jurisdictions. During a banking crisis, multiple bank subsidiaries entering into resolution will severely stretch the resources of Hong Kong’s resolution authorities. Moreover, small credit institutions, are not captured by the regime. Historically, small credit institutions have caused several systemic banking crises in Hong Kong. Moneylending markets have grown exponentially over the past decade with the emergence of FinTechs and TechFins. Consequently, Hong Kong’s moneylending market is becoming a financial stability risk because a substantial portion are inadequately regulated and fall outside the resolution regime.