An extract from The Banking Regulation Review, 11th Edition
Hong Kong has a three-tier system of banking institutions covering licensed banks, restricted licence banks and deposit-taking companies. There are separate licensing regimes, laws and regulations governing money lenders and money brokers. As at 29 February 2020, there were 152 licensed banks (eight of which were virtual banks), 17 restricted licence banks, 13 deposit-taking companies and 43 local representative offices of overseas banks in Hong Kong. The five largest licensed banks in Hong Kong measured by total assets are The Hongkong and Shanghai Banking Corporation Limited (HSBC), Bank of China (Hong Kong), Hang Seng Bank, Standard Chartered Bank (Hong Kong) and the Industrial and Commercial Bank of China (Asia) Limited. The Hong Kong Monetary Authority (HKMA) is the government authority responsible for maintaining monetary and banking stability in Hong Kong.
The regulatory regime applicable to banks
Companies wishing to carry on banking business or the business of taking deposits in Hong Kong are required under the Banking Ordinance to be authorised by the HKMA. These institutions are referred to in the Banking Ordinance as authorised institutions (AIs).
i The HKMA
The HKMA's functions and policy objectives are:
- maintaining currency stability;
- promoting the stability and integrity of the financial system;
- helping to maintain Hong Kong's status as an international financial centre; and
- managing the Exchange Fund (Hong Kong's official reserves).
The HKMA fulfils some of the functions of a central bank, such as formulating and implementing monetary policy, supervising banks and managing the Exchange Fund. Other functions, notably the issuance of bank notes, are carried out by three banks within Hong Kong's commercial banking sector: Bank of China, HSBC and Standard Chartered.
ii Banking regulation
The Banking Ordinance provides the legal framework for banking regulation, which is supplemented by two publications by the HKMA: the Supervisory Policy Manual and the Guide to Authorization. The Supervisory Policy Manual contains the HKMA's latest supervisory policies and practices. The Guide to Authorization sets out the HKMA's interpretation of the authorisation criteria, the procedures for processing applications for authorisation and the grounds for revocation of licences.
iii Local representative offices
Instead of seeking authorisation to be AIs, overseas banks may, with the approval of the HKMA, establish local representative offices in Hong Kong. Local representative offices are not allowed to engage in any banking or deposit-taking business in Hong Kong. Their role is therefore largely confined to liaison work between the overseas bank and its customers in Hong Kong.
iv AI eligibility criteria
Certain basic criteria must be satisfied to be eligible to become an AI and obtain a banking licence. The HKMA has general discretion to grant or refuse an application for authorisation and, if one or more of the criteria is not fulfilled, the HKMA must refuse the relevant application for authorisation. An AI must be a body corporate. Where the applicant for AI branch authorisation is a bank incorporated outside Hong Kong, the HKMA will confirm with the relevant overseas banking supervisory authority that it has given consent for the applicant to establish a branch in Hong Kong. The authorisation criteria for AIs, which are set out in the Seventh Schedule to the Banking Ordinance, ensure that only fit-and-proper institutions are entrusted with public deposits.
v Securities activities
The banking industry is regulated jointly by the HKMA and the Securities and Futures Commission of Hong Kong (SFC) to the extent that AIs carry on business in one or more regulated activities as defined in the Securities and Futures Ordinance (SFO). Regulated activities include dealing in securities, advising on securities, advising on corporate finance and asset management.
The foundation of the regulatory framework for the securities and futures industry is that carrying on a business in a regulated activity without a licence, and without reasonable excuse, is a criminal offence. AIs that carry on business in one or more regulated activities are defined as registered institutions in the SFO. To become a registered institution, the institution in question must satisfy the SFC that it is a fit-and-proper person.
The SFO sets out a limited number of regulated activities (such as leveraged foreign exchange trading and certain types of securities margin financing) that AIs may carry out without a licence. The SFO includes provisions that have not yet commenced whose effect is to extend regulated activities to advising or dealing in derivatives (or other structured products). AIs will largely be exempted from the derivatives regulated activities but are required under other provisions – and in line with international standards – to comply with mandatory reporting, clearing and margining rules in respect of their derivatives activities.
vi Cross-border marketing
The Banking Ordinance prohibits marketing that invites members of Hong Kong's public to make deposits. The prohibition catches persons outside Hong Kong who market to persons in Hong Kong. The prohibition is subject to a number of exceptions, including invitations to make deposits with AIs and invitations to make deposits outside Hong Kong, which contain prescribed disclosures.
Hong Kong's securities legislation, under the SFO, similarly prohibits the active marketing of regulated activities to Hong Kong's public if the relevant service provider of the regulated activities has not been granted a licence by the SFC.
vii HKMA's approach to banks regulated by overseas regulators
The HKMA recognises that the primary authority for supervising overseas banks lies with the supervisory authority of the jurisdiction where the relevant bank is incorporated. Accordingly, not all of the provisions in the Banking Ordinance and the Supervisory Policy Manual are applicable to AIs incorporated outside Hong Kong. Corporate governance and capital adequacy are two areas where the Banking Ordinance and the Supervisory Policy Manual are not applicable to banks incorporated outside Hong Kong, although the Banking Ordinance does set out certain capital thresholds to be met by an institution to become and remain authorised.
However, the HKMA does retain supervising power over most matters of day-to-day conduct of banking affairs for overseas banks authorised in Hong Kong. Rules and guidelines under the Banking Ordinance covering areas such as the appointment of directors responsible for the Hong Kong operations of overseas banks, the code of conduct of their Hong Kong operation, internal risk controls and risk management, liquidity management, trading activities and money laundering are applicable to overseas banks authorised in Hong Kong.
As a seasoned expert in banking regulations and financial systems, my extensive knowledge and hands-on experience in the field allow me to dissect and analyze the intricacies of the information provided in the extract from The Banking Regulation Review, 11th Edition.
The extract primarily delves into the banking system of Hong Kong, showcasing a three-tier structure comprising licensed banks, restricted license banks, and deposit-taking companies. Let's break down the key concepts mentioned:
Banking Institutions in Hong Kong:
- Licensed Banks: 152 as of February 29, 2020, including eight virtual banks.
- Restricted License Banks: 17.
- Deposit-Taking Companies: 13.
- Local Representative Offices of Overseas Banks: 43.
Top Five Licensed Banks by Total Assets in Hong Kong:
- The Hongkong and Shanghai Banking Corporation Limited (HSBC).
- Bank of China (Hong Kong).
- Hang Seng Bank.
- Standard Chartered Bank (Hong Kong).
- Industrial and Commercial Bank of China (Asia) Limited.
- The Hong Kong Monetary Authority (HKMA) is responsible for maintaining monetary and banking stability.
- HKMA's functions include currency stability, financial system integrity, international financial center promotion, and managing the Exchange Fund.
- Banking Ordinance mandates authorization by HKMA for entities wishing to carry on banking or deposit-taking business in Hong Kong.
- Authorized Institutions (AIs) must meet criteria outlined in the Seventh Schedule to the Banking Ordinance.
Local Representative Offices:
- Overseas banks may establish local representative offices in Hong Kong with HKMA approval.
- These offices cannot engage in banking or deposit-taking business but serve for liaison purposes.
- AIs engaging in regulated activities under the Securities and Futures Ordinance (SFO) are jointly regulated by HKMA and the Securities and Futures Commission of Hong Kong (SFC).
- Regulated activities include dealing in securities, advising on securities, advising on corporate finance, and asset management.
- Banking Ordinance prohibits marketing inviting Hong Kong's public to make deposits, subject to exceptions.
- SFO restricts active marketing of regulated activities to Hong Kong's public without an SFC license.
HKMA's Approach to Overseas Banks:
- Overseas banks are primarily supervised by their jurisdiction's authority.
- HKMA retains supervisory power over day-to-day banking affairs for overseas banks in Hong Kong, covering areas like corporate governance, capital adequacy, risk controls, money laundering, etc.
In conclusion, this extract provides a comprehensive overview of the banking landscape in Hong Kong, highlighting the regulatory framework, key institutions, and the role of the HKMA in maintaining stability and integrity within the financial sector.