HKMA Resolution Regime for Banks: The Legal Framework for Orderly Winding-Up of Financial Institutions

The Hong Kong Monetary Authority (HKMA) published a consultation paper in March 2025 proposing amendments to the resolution regime under the Banking Ordinance (Cap. 155). The paper responds to the Financial Stability Board’s 2024 peer review, which identified gaps in Hong Kong’s statutory framework for the orderly wind-down of systemically important banks. Without a robust resolution regime, a failing bank’s collapse could trigger contagion across the interbank market, destabilise the Hong Kong dollar peg, and exhaust the Exchange Fund’s deposit protection reserves. The proposed changes target three deficiencies: the absence of statutory bail-in powers for unsecured creditors, unclear triggers for initiating resolution over liquidation, and insufficient cross-border coordination mechanisms with mainland Chinese regulators. For any institution holding an authorisation under the Banking Ordinance, understanding the resolution regime is no longer optional — it is a condition of maintaining a licence. This article sets out the current legal framework, the proposed 2025 amendments, and the practical steps authorised institutions must take to comply.

The Current Resolution Framework under the Banking Ordinance (Cap. 155)

The HKMA’s resolution powers are codified in Part XVIA of the Banking Ordinance, enacted in 2017 following the Financial Institutions (Resolution) Ordinance (Cap. 628). The regime applies to all authorised institutions — licensed banks, restricted licence banks, and deposit-taking companies — that the HKMA designates as “resolution entities”. As of 31 December 2024, the HKMA had designated 27 institutions as resolution entities, covering all eight systemically important banks identified in the HKMA’s 2024 Systemic Risk Survey.

Statutory Resolution Objectives and Triggers

The legislation establishes five resolution objectives in section 2A of Cap. 155: (1) maintaining financial stability, (2) protecting depositors covered by the Deposit Protection Scheme (Cap. 581), (3) ensuring continuity of critical functions, (4) avoiding unnecessary destruction of value, and (5) minimising reliance on public funds. The HKMA must select the resolution action that best achieves these objectives while causing the least disruption to the financial system.

The trigger for resolution is set out in section 237A of Cap. 155. The HKMA may initiate resolution if it determines that an authorised institution is failing or likely to fail, and that no private-sector solution or regulatory intervention can prevent its failure within a reasonable timeframe. The “failing or likely to fail” determination requires the HKMA to assess whether the institution’s liabilities exceed its assets, whether it has or will soon breach minimum capital requirements under the Banking (Capital) Rules (Cap. 155L), or whether it is unable to pay its debts as they fall due. The HKMA must notify the Financial Secretary within 24 hours of making this determination.

Resolution Tools Available to the HKMA

Part XVIA provides five resolution tools. The first is the sale of business tool, which allows the HKMA to transfer all or part of the institution’s business, shares, or assets to a private-sector purchaser without obtaining shareholder or creditor consent. The second is the bridge institution tool, which permits the HKMA to transfer critical functions to a temporary publicly-owned entity for up to two years. The third is the asset management vehicle tool, which segregates non-performing or hard-to-value assets into a separate vehicle to maximise recovery value. The fourth is the bail-in tool, which writes down or converts into equity the unsecured liabilities of the institution — excluding protected deposits under Cap. 581 and secured liabilities — to recapitalise the entity. The fifth is the temporary public ownership tool, which nationalises the institution for a period not exceeding 12 months.

The HKMA’s 2024 Annual Report records that the authority conducted two resolution simulation exercises in 2024, each involving six authorised institutions. The exercises tested the sale of business tool and the bridge institution tool under a scenario where a mid-sized licensed bank experienced a sudden deposit run of HKD 45 billion over three business days.

The 2025 Proposed Amendments: Bail-In Powers and Cross-Border Coordination

The March 2025 consultation paper proposes three substantive amendments to Part XVIA. The first addresses the statutory hierarchy of creditors in a resolution. Under current law, the bail-in tool applies only to unsecured liabilities that are not excluded under section 237J. The proposed amendment would create a statutory ranking that places senior unsecured bondholders below depositors and above subordinated creditors, aligning with the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions (2023 update).

Expanded Bail-In Scope and Creditor Safeguards

The second proposed amendment expands the scope of liabilities subject to bail-in to include certain structured deposits and unsecured interbank borrowings with original maturities exceeding 30 days. The HKMA estimates that this change would increase the pool of bail-in-able liabilities across the designated resolution entities by approximately HKD 1.2 trillion, based on data from the HKMA’s 2024 Banking Stability Report. The consultation paper states that the expanded scope would reduce the probability of requiring Exchange Fund support from 12% to 4% in a severe stress scenario.

The third proposed amendment introduces a creditor safeguard mechanism. Under the current framework, creditors whose claims are written down or converted in a bail-in have no statutory right to compensation. The proposed section 237R would grant any creditor whose position is worse off than in a hypothetical liquidation the right to claim compensation from the Resolution Fund, which is capitalised by annual levies on all authorised institutions. The levy rate for 2025 is set at 0.008% of total liabilities, as published in the HKMA’s Gazette Notice No. 12 of 2025.

Cross-Border Recognition and Coordination

The fourth proposed amendment addresses cross-border recognition. The HKMA proposes to enter into resolution cooperation agreements with the China Banking and Insurance Regulatory Authority (CBIRC) and the Hong Kong Monetary Authority’s counterpart in Macau, the Monetary Authority of Macau. These agreements would establish a framework for recognising each jurisdiction’s resolution actions and sharing confidential supervisory information during a cross-border resolution. The consultation paper references the 2023 Memorandum of Understanding between the HKMA and the CBIRC on Financial Stability Cooperation as the legal foundation for these agreements.

The fifth proposed amendment introduces a statutory stay on early termination rights in financial contracts during a resolution. Under proposed section 237T, counterparties to derivatives, securities financing transactions, and repurchase agreements would be prohibited from terminating their contracts solely because the institution enters resolution. The stay would last for 48 hours, during which the HKMA would transfer the contracts to a bridge institution or purchaser. This mirrors the stay provisions in the United Kingdom’s Banking Act 2009 and the European Union’s Bank Recovery and Resolution Directive.

Practical Compliance Obligations for Authorised Institutions

All authorised institutions, regardless of whether they are designated as resolution entities, must comply with resolution planning requirements under section 237U of Cap. 155. The HKMA issued a supervisory circular on 15 January 2025 setting out the updated resolution planning standards, effective from 1 July 2025.

Resolution Plan Content and Submission Deadlines

The circular requires each institution to submit a resolution plan annually by 31 March. The plan must include: (1) a legal entity structure chart showing all subsidiaries and branches, (2) an identification of critical functions and core business lines, (3) a funding and liquidity analysis demonstrating how the institution could maintain operations for 30 days under resolution, (4) a valuation methodology for bail-in-able liabilities, and (5) a communication strategy for depositors, counterparties, and the media. The HKMA will assess the plan against four criteria: feasibility, credibility, consistency with the HKMA’s resolution strategy, and compliance with the Banking (Disclosure) Rules (Cap. 155M).

Institutions that fail to submit a compliant resolution plan face escalating enforcement actions. The HKMA may first issue a direction under section 237V requiring rectification within 30 days. If the institution remains non-compliant, the HKMA may impose a financial penalty of up to HKD 10 million per contravention, as provided in section 237W. The HKMA’s 2024 Enforcement Report records that no institution has yet been penalised for resolution planning failures, but the authority conducted three on-site inspections of resolution plan compliance in 2024.

Data and Systems Readiness for Bail-In Execution

The proposed bail-in expansion requires institutions to maintain granular data on their liability structures. The HKMA circular specifies that institutions must be able to identify, within four hours of a resolution trigger, the following for each liability: (1) the legal entity that issued it, (2) its governing law and jurisdiction, (3) its seniority ranking, (4) whether it is excluded from bail-in under section 237J, and (5) the value of the liability as at the close of business on the previous day. The HKMA expects institutions to test this data retrieval capability through a live simulation at least once per calendar year.

The circular also requires institutions to maintain a resolution playbook that documents the steps for executing each resolution tool. The playbook must be reviewed and approved by the board of directors annually. The HKMA’s 2024 Thematic Review on Resolution Planning found that 14 out of 27 designated resolution entities had playbooks that did not adequately address the bail-in tool’s operational requirements, including the calculation of conversion ratios and the issuance of new equity instruments to bailed-in creditors.

Key Takeaways for Compliance Officers and Authorised Institutions

1. The HKMA’s 2025 proposed amendments will expand bail-in powers to cover structured deposits and short-term interbank borrowings, increasing the bail-in-able liability pool by an estimated HKD 1.2 trillion — compliance officers must begin mapping their institution’s liability structure against the proposed expanded scope now.

2. Annual resolution plan submissions are due by 31 March each year, with the HKMA’s 2025 circular introducing four new assessment criteria — institutions should conduct a gap analysis against the updated standards before the 1 July 2025 effective date.

3. The proposed 48-hour statutory stay on early termination rights will affect all derivatives and securities financing contracts — legal teams must review existing master agreements (including ISDA and GMRA templates) to ensure they do not contain provisions that would conflict with the stay.

4. The new creditor safeguard mechanism under proposed section 237R creates a compensation right for creditors worse off in resolution than in liquidation — institutions should document the valuation methodologies that would support a “no creditor worse off” analysis in their resolution playbooks.

5. Cross-border resolution cooperation agreements with mainland Chinese and Macau regulators are expected to be finalised by Q4 2025 — institutions with cross-border operations must ensure their resolution plans address how recognition of foreign resolution actions would affect Hong Kong-issued liabilities.

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