Bank
French word
A bank is a financial
“Banque”
institution for
means
keeping money
safekeeping.
and valuables
safely, the money
is paid out on the Italian word
customer’s order. “Banca”
means
transaction.
Bank
A bank is a financial intermediary. In Hong
Kong, the Banking Ordinance defines a bank
as a company which carries on banking
business and holds a valid licence granted by
the Hong Kong Monetary Authority together
with the Special Administrative Region Chief
Executive.
Banking
Hong Kong Banking Ordinance 1948 defined
banking as
“the receipt of money on current or deposit account
or in payment and collection of cheques drawn by
or paid in by a customer or in the making or
receipt of remittances or in the purchase and sale
of gold or silver coin or bullion.”
Three-tier financial system
Before 1989 : After 1989 :
• Licensed Banks • Licensed Banks
• Licensed Deposit- • Restricted
Taking Companies
Licence Banks
• Registered
Deposit-Taking • Deposit-Taking
Companies Companies
Statistics of the Banking Sector
At the end of June 2004, there were 134
licensed banks, 43 restricted licence
banks and 37 deposit-taking companies
in business. The total number of
authorized institutions was 214.
Moreover, there were 89 representative
offices of overseas financial institutions.
Statistics of Authorized Institutions
Authorized 2001 2004
Institutions December June
Licensed Banks 29 24
(Hong Kong)
Licensed Banks 118 110
(Overseas)
Restricted 49 43
Licence Banks
Deposit-taking 54 37
Companies
Three-tier Financial Structure
Authorized Licensed Restricted Deposit-
Institution Bank Licence Taking
Bank Company
Paid-up HK$150 HK$100 HK$25
Share Capital Million Million Million
Amount of Not Not less than Not less than
each deposit restricted HK$500,000 HK$100,000
Maturity of Not Not Not less than
each deposit restricted restricted 3 months
Licensed banks
In Hong Kong, only licensed banks
may operate current and savings
accounts, and accept deposits of any
size and maturity from the public
and pay or collect cheques drawn by
or paid in by customers.
Restricted licence banks
Restricted licence banks are principally
engaged in merchant banking and
capital market activities. They may
take deposits of any maturity of
HK$500,000 (approximately
US$64,103) and above.
Deposit-taking companies
Deposit-taking companies are mostly owned
by, or otherwise associated with, banks.
These companies engage in a range of
specialised activities, including consumer
finance and securities business. They may
take deposits of HK$100,000
(approximately US$12,821) or above with
an original term of maturity of at least
three months.
The requirements for granting
a bank licence
• Minimum paid-up share capital of not less than
HK$150 million for Licensed Banks and
HK$100 million for Restricted Licence Banks.
• For overseas applicant, the company must be
incorporated in a country where the
supervisory authorities have the capabilities to
meet the minimum supervision standards as
recommended by the Basle Committee.
The requirements for granting
a bank licence
• There is also an asset requirement for Licensed
Banks, i.e. US$16 billion for overseas applicant
and HK$4 billion for local applicant.
• For local applicant, it has been an authorized
institution for at least 10 years. Moreover,
there is an additional requirement for Licensed
Bank which is the minimum public deposit of
HK$3 billion.
The requirements for granting
a bank licence
• Whether or not the HKMA issues a licence to
an applicant also depends on the applicant’s
own merit, a prudent attitude towards the
banking business and the overall considerations
of the banking industry at large.
• For a foreign bank to obtain a licence in Hong
Kong, the HKMA will also consider if there is
any reciprocity to Hong Kong banks in that
country.
Development of Banking in Hong Kong
The rapid industrialization in Hong Kong since
the 1950s improved the standard of living of a
fast-growing population.
Many banks started to build up a branch
network to expand their business.
As competition intensified, the banks started to
offer higher interests to depositors in order to
attract funds, and easier terms to borrowers in
order to increase their lending portfolio.
Development of Banking in Hong Kong
By 1961, both the real estate and stock markets
were booming. The problem of liquidity
squeeze arised in some smaller banks and a
bank run started on the Liu Chong Hing Bank.
To solve the problem, the Hongkong and
Shanghai Banking Corporation and the
Chartered Bank declared a joint support for
the Liu Chong Hing Bank.
Development of Banking in Hong Kong
In 1965, a bank run started again on the Ming
Tak Bank and the Canton Trust & Commercial
Bank Limited. The liquidation proceedings
revealed the banks’ huge investment in real
estate. The panic-stricken public started to
withdraw deposits from Hang Seng Bank Ltd.,
Kwong On Bank Ltd., Dao Heng Bank Ltd.,
Far East Bank Ltd. and Wing Lung Bank Ltd.
Development of Banking in Hong Kong
To tackle the problem :
(i) Hongkong and Shanghai Banking Corporation
and Chartered Bank declared their unlimited
support for the banks;
(ii) The Exchange Banks’ Association decided
that before maturity, no deposits were allowed
to be withdrawn with penalty in interest
payable.
Development of Banking in Hong Kong
As the funds of the financial institutions were basically
short-term in nature, overexposure in the long-term
property sector automatically led to a fundamental
imbalance in the liquidity of the banking system.
In 1982 the prominent Tse Lee Yuen chain of jewellery
outlets went into liquidation and many small investors
who had purchased the “gold certificates” issued by the
company lost substantial sums of money. There was a
bank run on the Hang Lung Bank Ltd. which had close
connections with the Tse Lee Yuen group.
Development of Banking in Hong Kong
Banking Ordinance 1964
All locally-incorporated banks were required to publish
their annual accounts in at least one English and one
Chinese newspaper, along with a list of directors,
principal officers and subsidiaries.
The small family-owned unincorporated banks were
allowed to continue but were not authorized to use the
word “bank” and were not empowered to accept
deposits for more than $2 million at any one time from
the public.
Development of Banking in Hong Kong
Banking Ordinance Amendment 1967
(i) The Commissioner of Banking was granted the regulatory
powers, with the Financial Secretary retaining an overall
consultative role.
(ii) The minimum net worth of banks eligible for licences was
raised from $5 million to $10 million.
(iii) The Commissioner was empowered to appoint a second
auditor to examine a bank’s accounts.
Development of Banking in Hong Kong
From the early 1970s, there were finance
companies engaging in multi-currency deposit-
taking, corporate finance, underwriting new
shares, loan syndication, hire purchase, etc.
With the collapse of the stock market in 1973,
there was concern over the supervision of the
unregulated finance companies in order to
protect the interests of depositors.
Development of Banking in Hong Kong
Deposit-Taking Companies Ordinance 1976 :
(i) DTCs were required to register with the
Commissioner of Banking on payment of an annual fee.
(ii) The minimum paid-up capital was $2.5 million
(iii) DTCs were prohibited from using the term “bank”
and from accepting public deposits of less than $50,000.
(iv) DTCs were required to published their audited
annual accounts.
Development of Banking in Hong Kong
The three-tier structure of financial institutions, consisting
of Licensed Banks, Licensed Deposit-Taking Companies
and Registered Deposit-Taking Companies, was formed
with the enactment of the Deposit-Taking Companies
(Amendment) Ordinance 1981. The rationale was :
(i) To ensure the effectiveness of the interest rate
agreement of the Hong Kong Association of Banks as a
monetary policy instrument.
(ii) To control the inflationary effect of a “free for all”
interest rate regime.
(iii) To ensure the general stability of the monetary system
by protecting the small depositors through the control of
competition in deposit taking.
Development of Banking in Hong Kong
In 1983, while there was the currency crisis, the
Hang Lung Bank Ltd. was insolvent. Through
the Exchange Fund, the government took over
the bank and injected HK$300 million into the
paid-up capital. The shareholders of the bank
were not paid any compensation and all
directors were removed. The criminal
investigations discovered a multi-billion dollar
illegal operation.
Development of Banking in Hong Kong
In 1985, the directors of the Overseas Trust Bank Ltd.
declared the company to be insolvent, with its subsidiary
the Hong Kong Industrial and Commercial Bank Ltd.
The government acquired the banks again through the
Exchange Fund, because the government remains
committed to its policy of safeguarding the exchange
rate of Hong Kong dollar and the stability and
reputation of the banking system”. However, the
Legislative Council criticised the use of public funds to
rescue mismanaged and fraudulent private sector
organization.
Development of Banking in Hong Kong
Banking Ordinance 1986
The posts of Commissioner of Banking and Commission of
DTCs were merged into one.
(i) The Commissioner of Banking is charged with the
general duty of promoting sound business practices
through improved prudential supervision of the banking
sector.
(ii) The Commissioner may issue guidelines on business
practices to be followed by the authorized institutions.
Development of Banking in Hong Kong
In 1989, the broader activities of the deposit-
taking companies needed recognising and
the Banking Commissioner upgraded the
status of licensed deposit-taking companies
to restricted licensed banks.
The Banking (Amendment) Ordinance 1999
brought Hong Kong's banking supervision fully
in line with the Basel Committee's core principles
for effective banking supervision.
Money Supply in China and Hong Kong
RMB’million, HKD’million, (June 2004)
Money Supply China Hong Kong
M0 Currency in 19,017,890 146,332
circulation
M1 88,627,450 385,100 HKD
62,538 FC
M2 236,242,280 2,068,749 HKD
1,759,281 FC
M3 (includes 236,242,280 + 2,083,914 HKD
FC Deposits) 11,949,070 1,792,552 FC
Money Supply in China and Hong Kong
Definitions
RMB Money Supply in China
M0 Currency in circulation
M1= M0 + Demand Deposits
M2 = M1 + Time Deposits + Savings
Deposits + Other Deposits
Money Supply in China and Hong Kong
Definitions
Money Supply in Hong Kong
M0 = Notes and coins in circulation
M1 = M0 + Demand deposits with licensed banks
M2 = M1 + Savings and Time deposits with licensed
banks + NCD issued by banks held outside the
monetary sector
M3 = M2 + Deposits with RLB and DTC + NCD
issued by RLB and DTC held outside the
monetary sector
Distribution of Deposits in Hong Kong
HK$’million (June 2004)
Authorized HKD Foreign Total
Institutions Currency
LB: Demand 249,754 62,538 312,292
Deposits
LB: Savings 951,660 370,201 1,321,861
Deposits
LB: Time Deposits 666,443 1,222,897 1,889,340
Distribution of Deposits in Hong Kong
HK$’million (June 2004)
Authorized HKD Foreign Total
Institutions Currency
RLB Deposits 11,475 29,870 41,345
DTC Deposits 3,095 1,573 4,668