| (3) | Matters specifically related to consolidated supervision |
| (a) | Supervision of a banking group on a consolidated basis, that is, consolidated supervision— |
| (i) | aims to achieve at least two primary objectives, namely— |
| (A) | to duly capture all material risks to which the banking group may be exposed, including its exposure to credit risk, market risk and operational risk; |
| (B) | to preserve the integrity of the banking group's capital and reserve funds, amongst other things, by eliminating any double or multiple gearing of capital and reserve funds; |
| (ii) | includes the accounting consolidation or sub-consolidation of financial information by a bank or controlling company at such a level or sub-group of the banking group and in such a manner as may be prescribed in these Regulations or specified in writing by the Registrar; |
| (iii) | is an overall evaluation, both quantitative and qualitative, of the risks incurred by and the strength of a group to which a bank belongs, primarily to assess the potential impact of other group financial entities on the bank; |
| (iv) | means the supervision of a bank as part of a group of entities to which the bank belongs and therefore, as a minimum, includes all financial entities and all financial activities within the banking group without the Regi being responsible for the supervision of any non-bank entity, which entities or activities include— |
| (A) | all banks in the relevant banking group; |
| (B) | all related regulated or unregulated financial entities or financial activities conducted by such banks or any relevant subsidiary, joint venture or associate; |
| (C) | the controlling company of such banks; |
| (D) | all related regulated or unregulated financial entities or financial activities conducted by such controlling company or any relevant subsidiary, joint venture or associate; and |
| (E) | any other entity that may be specified in the form BA 600, this regulation 36 or in writing by the Registrar, the financial distress or potential insolvency of which entity is deemed by the Registrar potentially to constitute a material or significant risk to the relevant banking group, |
provided that the Registrar may, subject to such conditions as may be specified in writing by the Registrar, exempt a financial entity, financial activity or non-financial entity from being included in consolidated returns or consolidated reporting.
| (v) | serves as a compliment to instead of a substitute for the solo supervision of a bank. |
Consolidated supervision thus may extend to all the companies, institutions or entities in a banking group, including a controlling company and its subsidiaries, joint ventures and companies, institutions or entities in which the controlling company or its subsidiaries have a direct or an indirect participation.
| (b) | Once a bank or controlling company adopts— |
| (i) | the IRB approach for the measurement of a part of its relevant exposures to credit risk, the said bank or controlling company, as the case may be, shall, with the exception of its relevant exposure to central counterparties, as envisaged in regulation 23(16), adopt the said approach across all relevant significant asset classes, significant business units and relevant significant entities or activities within the banking group, provided that— |
[Regulation 36(3)(b)(i) substituted by section 7(a) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]
| (A) | when the bank or controlling company is unable to adopt the said approach across all significant asset classes, business units and relevant entities or activities within the banking group, the bank or controlling company may adopt a phased rollout of the IRB approach across the banking group, which phased rollout may include— |
| (i) | the adoption of the IRB approach across asset classes within the same business unit; |
| (ii) | the adoption of the IRB approach across business units in the same banking group; and |
| (iii) | moving from the foundation approach to the advanced approach for certain risk components; |
| (B) | when the bank or controlling company adopts the IRB approach for an asset class within a particular business unit or in the case of retail exposures for an individual sub-class the bank or controlling company shall apply the IRB approach to all exposures within that asset class or sub-class in the said business unit; |
| (C) | when the bank or controlling company is unable to adopt the said approach across all relevant significant asset classes, business units and relevant entities or activities within the banking group the said bank or controlling company shall submit in writing to the Registrar a detailed implementation plan, which implementation plan, as a minimum, shall specify the extent to which and expected dates by which the bank or controlling company intends to roll out over time the IRB approach across all relevant significant asset classes, or subclasses in the case of retail, and relevant business units or activities; |
| (D) | subject to the prior written approval of and such conditions as may be specified in writing by the Registrar, the Registrar may exempt a bank or controlling company from implementing the IRB approach in respect of non-significant business units, activities or asset classes, or sub-classes in the case of retail, provided that the relevant exempt exposures— |
| (i) | shall be regarded as non-significant in terms of size and perceived risk profile; |
| (ii) | shall be subject to the relevant requirements of the standardised approach specified in regulations 23(8) and 23(9); |
| (E) | once a bank or controlling company adopted the IRB approach for all or part of any of its corporate, bank, sovereign, or retail asset classes, the bank or controlling company, as the case may be, shall simultaneously adopt the IRB approach for its equity exposures, subject only to materiality; |
| (F) | the Registrar may require a bank or controlling company to implement one of the IRB equity approaches when its equity exposures constitute a significant part of the bank or controlling company's business, even though the bank or controlling company may not adopt an IRB approach in respect of other business units or activities; |
| (G) | once a bank or controlling company adopted the IRB approach for corporate exposure, the bank or controlling company, as the case may be, shall adopt the IRB approach in respect of the specialized lending sub-classes within the corporate exposure class; |
| (H) | once a bank or controlling company, for example— |
| (i) | adopted the advanced IRB approach the bank or controlling company, as the case may be, shall not be allowed to revert to the standardised or foundation IRB approach unless, based on extraordinary circumstances, the Registrar grants approval for the bank or controlling company to revert to the said standardised or foundation IRB approach; |
| (ii) | adopted the foundation IRB approach the bank or controlling company, as the case may be, shall not be allowed to revert to the standardised approach unless, based on extraordinary circumstances, the Registrar grants approval for the bank or controlling company to revert to the said standardised approach; |
| (I) | due to data limitations often associated with exposures arising from specialized lending, a bank or controlling company may remain on the prescribed slotting criteria approach specified in regulation 23(11)(d)(iii) for one or more of the specialized lending sub-classes, and move to the foundation or advanced approach for other subclasses within the corporate asset class, provided that the bank or controlling company shall not implement the advanced approach in respect of the high-volatility commercial real estate sub-class without simultaneously doing so for material or significant income producing real estate exposure; |
| (J) | irrespective of materiality or significance, any relevant exposure to a central counterparty as envisaged in regulation 23(16), arising from an OTC derivative instrument, an exchange traded derivative instrument or a securities financing transaction, shall be treated in accordance with the relevant requirements specified in the said regulation 23(16), provided that, when assessing significance or materiality for purposes of item (D) above, the relevant measure or ratio shall be unaffected by the bank or controlling company’s relevant exposure to central counterparties that are subject to the relevant requirements specified in regulation 23(16), that is, the said exposures shall be excluded from both the numerator and the denominator of any relevant ratio used for purposes of item (D) above; |
[Regulation 36(3)(b)(i)(J) substituted by section 7(b) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]
| (K) | the bank or controlling company shall comply with such further conditions as may be specified in writing by the Registrar after consultation with any relevant host supervisor; |
| (ii) | the internal model method for the measurement of the bank or controlling company's exposure to counterparty credit risk arising from a particular category of exposure, such as OTC derivative instruments or securities financing transactions, the bank or controlling company, as the case may be, shall submit in writing to the Registrar a sufficiently detailed plan to include in the said internal model method all material or significant exposure to counterparty credit risk arising from the said category of exposure, provided that— |
| (A) | irrespective of the method adopted by the reporting bank or controlling company for the measurement of its exposure to counterparty credit risk arising from OTC derivative instruments or securities financing transactions, the bank or controlling company may adopt any of the methods envisaged in regulations 23(15) to 23(19) of these Regulations for the measurement of the bank or controlling company’s consolidated exposure or EAD arising from long settlement transactions; |
[Regulation 36(3)(b)(ii)(A) substituted by section 7(c) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]
| (B) | in respect of exposure to counterparty credit risk for which the said bank or controlling company has not obtained approval from the Authority to adopt the internal model method, the bank or controlling company shall adopt within the banking group the standardised approach set out in regulation 23(18) for the measurement of the bank or controlling company’s exposure to counterparty credit risk; |
[Regulation 36(3)(b)(ii)(B) substituted by section 7(d) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]
| (iii) | the more sophisticated approaches for the measurement of the bank or controlling company's exposure to operational risk, the bank or controlling company, as the case may be, shall not revert to a simpler approach unless the bank or controlling company no longer complies with the relevant qualifying criteria for the said more sophisticated approach and the Registrar requires the bank or controlling company to revert to the said simpler approach for some or all of its operations, until the said bank or controlling company complies with the relevant conditions specified by the Registrar in order for the bank or controlling company to return to the more advanced approaches, provided that— |
| (A) | a bank or controlling company with significant exposure to operational risk shall adopt an approach that is appropriate for the risk profile of the said bank or controlling company; |
| (B) | subject to such conditions as may be specified in writing by the Registrar, a bank or controlling company may adopt the basic indicator, standardised or alternative standardised approach for some parts of its operations, and an advanced measurement approach for others; |
| (C) | the bank or controlling company shall comply with such further conditions as may be specified in writing by the Registrar after consultation with any relevant host supervisor regarding the bank or controlling company's consolidated exposure to operational risk; |
| (iv) | the internal models approach for the measurement of one or more risk categories such as interest rates, foreign exchange rates that company, during the time period specified in writing by the Registrar and subject to the relevant requirements specified in regulations 28(5), 28(8) and subregulation (9), to develop and implement an integrated risk measurement system that captures and measures the bank's aggregate exposure to market risk arising from all the said categories of risk. |
