Question

Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business.

(a) It is often said that Hong Kong maintains a “three-tier banking system.” Critically review the key features of this system.

(b) Banks in Hong Kong are overly regulated by the Hong Kong Monetary Authority. Do you agree with this statement? Please cite three examples

Answer 1

(a)Hong Kong maintains a three-tier system of deposit-taking institutions, namely, licensed banks, restricted licence banks, deposit-taking companies. They are collectively known as authorized institutions.

There are separate licensing regimes, laws and regulations governing money lenders and money brokers.The five largest licensed banks in Hong Kong measured by total assets are HSBC, Bank of China (Hong Kong), Hang Seng Bank, Standard Chartered Bank (Hong Kong) and Bank of East Asia. The Hong Kong Monetary Authority (HKMA) is the government authority responsible for maintaining monetary and banking stability in Hong Kong.

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. 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.

(b)The Banking Ordinance provides the legal framework for banking supervision in Hong Kong. Section 7(1) of the Ordinance provides that the principal function of the Monetary Authority is to "promote the general stability and effective working of the banking system".

The HKMA seeks to establish a regulatory framework in line with international standards, in particular those issued by the Basel Committee on Banking Supervision and the Financial Stability Board.

Authorized institutions have to comply with the provisions of the Banking Ordinance which, among other things, require them to maintain adequate liquidity and capital, to submit periodic returns to the HKMA, to adhere to limitations on exposures to any single customer (or group of customers) or to directors and employees, and to seek approval for the appointment of directors and chief executives, and for controllers

The HKMA follows international practices as recommended by international standard-setting bodies, such as the Basel Committee on Banking Supervision, to supervise authorized institutions.