Chapter 7 Regulators of the Banking System in Hong Kong

1. Chapter 7Regulators of the Banking System in Hong Kong Hong Kong Monetary Authority Hong Kong Association of Banks

2. Hong Kong Monetary Authority (HKMA) The Hong Kong Monetary Authority was established in 1993 by merging the Office of the Exchange Fund with the Office of the Commissioner of Banking. The purpose is to maintain the continuity and professionalism in Hong Kong’s monetary and reserves management and banking supervision, in a way which commands the confidence of the people of Hong Kong and the international financial community.

3. HKMA is responsible for : (i) the development and execution of monetary policy; (ii)maintenance of exchange rate and monetary stability; (iii) the development of the debt market in Hong Kong; (iv) promoting the efficiency, integrity and development of payment and settlement arrangements;

4. HKMA is responsible for : (v) managing the assets of the Exchange Fund; (vi) prudential supervision of authorised institutions under the Banking Ordinance; and (vii) formulating policies relating to banking supervision.

5. Roles of HKMA in the Government structure of Hong Kong HKMA is an integral part of the government, but is able to employ staff on different terms to those of the civil service to attract personnel of the right calibre, experience and expertise. HKMA is accountable to the Financial Secretary, who is advised by the Exchange Fund Advisory Committee on matters relating to the control of the Exchange Fund and on the annual budget of the HKMA.

6. Roles of HKMA in the banking system of Hong Kong Bank notes are issued by the Hongkong and Shanghai Banking Corporation Limited, Standard Chartered Bank, and Bank of China Hong Kong Branch. But coins are issued by the Hong Kong Monetary Authority.

7. Roles of HKMA in the banking system of Hong Kong As the Exchange Fund is managed by HKMA, and under the Linked Exchange Rate System, when the note-issuing banks want to issue Hong Kong dollar bank notes, they must obtain the authority from the HKMA through the Exchange Fund’s Certificate of Indebtedness. The Certificates of Indebtedness are issued and redeemed against US dollars at a fixed exchange rate of HK$7.80.

8. Roles of HKMA in the banking system of Hong Kong Under the 1988 Accounting Arrangements with the HSBC, the Exchange Fund took over the clearance of debts through the Central Moneymarket Unit. Now cheque clearance has been taken up by the Hong Kong Interbank Clearing Limited, which is 50% owned by the HKMA and 50% owned by the Hong Kong Association of Banks, with the settlement handled through the HKMA books of accounts.

9. Roles of HKMA in the banking system of Hong Kong HKMA has also introduced the Liquidity Adjustment Facility into the banking system, which can be regarded as Hong Kong’s discount window. If banks are in need of short-term reserve, it can borrow money from HKMA at an interest rate. On the other hand, if banks have surplus fund, they can deposit money with HKMA for interest. HKMA has the role of the lender of last resort.

10. Roles of HKMA in the banking system of Hong Kong With the exchange fund bills and notes introduced in 1990, HKMA is in a position to influence the money supply through the level of interbank liquidity and the price of money through the interbank interest rates in Hong Kong.

11. Banking supervision functions The objective of promoting the safety and soundness of the banking system is shared among three departments of the HKMA. The Banking Supervision Department is responsible for the day-to-day supervision of authorized institutions. The Banking Policy Department is responsible for the formulation of supervisory policies to promote the safety and soundness of the banking sector. The Banking Development Department is responsible for the formulation of policies to promote the development of the banking industry.

12. Banking supervision functions In 2001 HKMA conducted 221 on-site examinations of the authorized institutions’ Hong Kong operations and 11 on-site examinations of locally incorporated authorized institutions’ overseas operations. The HKMA also created six specialist teams for the on-site examinations : two for money laundering, one for derivatives and three for securities.

13. Banking supervision functions The HKMA maintains close working relationship with banking supervision authorities in other countries. There are overseas visits and bilateral meetings arranged with those banking regulators in the U.S.A., U.K., Japan, Singapore, etc. There are also regular meetings held with the People’s Bank of China to discuss banking supervisory matters.

14. Banking Reform The HKMA has been implementing some policy initiatives in the banking reform programme announced in 1999. These initiatives are aimed at promoting market liberalization and competitiveness in the banking sector, as well as strengthening banking infrastructure with a view to enhancing the safety and soundness of the banking sector.

15. Banking Reform Interest rate deregulation • The final phase of interest rate deregulation in 2001 involved the removal of the interest rate cap on savings accounts and the prohibition of the payment of interest on current accounts. The objective was to make all deposit interest rates subject to competitive market forces.

16. Banking Reform Removal of the three-building condition • The condition restricted the number of buildings from which foreign banks licensed after 1978 and foreign restricted licence banks licensed after 1990 could operate. The removal of the restriction is intended to provide foreign financial institutions with greater flexibility in doing business in Hong Kong and to enhance Hong Kong’s position as a free and open financial centre.

17. Banking Reform Market entry criteria of licensed banks • The US$16 billion asset size criterion for foreign bank applicants will be replaced by the same criteria applicable to local bank applicants, i.e. HK$4 billion for total assets and HK$3 billion for customer deposits. The requisite period of operation as a Restricted Licence Bank or Deposit-taking Company will be reduced from ten to three years.

18. Banking Reform Deposit insurance scheme • The deposit insurance is a move to enhance the safety and soundness of the banking system by reimbursing depositors who suffer from the failure of a bank taking their deposits. The fund size is targeted at HK$1.5 billion and the annual premium to be paid by the banks will be structured using a differential premium system based on the supervisory ratings of institutions.

19. Banking Reform Consumer credit data sharing • The sharp rise in personal bankruptcies has posed a warning signal to the banking business. The Hong Kong Association of Banks submitted a proposal to the HKMA in 2001 on the sharing of full positive consumer credit data on all new and existing accounts for all types of consumer lending. The HKMA is working with the Privacy Commissioner in addressing the privacy issues related to sharing of positive data of customers of banks in Hong Kong.

20. Hong Kong Association of Banks (HKAB) By the Hong Kong Association of Banks Ordinance 1980, the HKAB was established in 1981 to take over the functions of the unincorporated Exchange Banks’ Association. HKAB is a statutory body and every licensed bank is obliged to be a member of HKAB and to observe the rules agreed upon by the HKAB Committee. HKAB can discipline its members to the point of expulsion for breaching its rules.

21. Roles of HKAB • To promote the interests of all fully licensed banks in Hong Kong and to make rules for the conduct of banking business, in consultation with the Financial Secretary • To be a focal point for consultation on law reform, new legislation and regulatory matters • To form a sounding-board for the Government and other relevant bodies on a range of general business and banking issues

22. Roles of HKAB • To offer a channel of communication among its members and third parties • To promote best practice, advise members on issues of common concern and provide an information service (eg circulars on lost items of payment instruments) • To organise or sponsor conferences on topical issues and half-yearly dinners with distinguished speakers

23. HKAB’s Organization and Governance • The Association is incorporated under its own Ordinance, with its management and powers vested in the Committee. It is under the control of its members, represented by their designated senior members of management, in general meetings. Each member bank must designate a senior member of management to represent it vis-a-vis HKAB. at meetings.

24. HKAB’s Organization and Governance The business and policy of the Association are set by a 12-member Committee and its operations are managed by a Secretary, seconded part-time and appointed by the Chairman bank.

25. HKAB’s Organization and Governance The composition of the Committee is carefully balanced to reflect the diversity of the Association's membership. The three note-issuing banks, Bank of China, Standard Chartered Bank and The Hongkong and Shanghai Banking Corporation Limited, are continuing members and hold office while they hold banking licences in Hong Kong. Of the remaining 9 members, elected triennially, four are local banks and five are foreign banks. Since 1996, the chairmanship of HKAB alternates every year among the three continuing members.

26. HKAB’s Organization and Governance Activities of the Committee are subject to quarterly review by the Consultative Council, a 24-bank body comprising 21 banks with geographically-based constituencies and the three continuing members. The Consultative Council advises the Committee on matters relating to the business of banking and also acts as a body for two-way communication between member banks and the Committee. The Chairman of the Committee reports on HKAB’s activities to the Consultative Council at its quarterly meeting, when Council members may comment on and raise issues of common interest.

27. HKAB’s Organization and Governance Based on the recommendation by the Disciplinary Committee, the Committee has power to impose penalties, ranging from reprimand to expulsion of membership, on a member which has breached any rules of the HKAB.

28. HKAB’s Organization and Governance For more complex, technical or specific topics, HKAB may set up specialized committees or working groups to conduct studies and make recommendations for endorsement by the Committee. HKAB member banks, often Committee members, also nominate staff to represent the HKAB on external bodies.

29. HKAB’s Organization and Governance The External Affairs Committee plans, oversees and co-ordinates lobbying and representational activities on issues affecting the banking industry. It also establishes and maintains links with banking associations and relevant trade bodies in the mainland China, Asia Pacific and other financial centers to facilitate the sharing of views.

30. HKAB’s Organization and Governance The General Rules Committee handles enquiries relating to General Rules and the International Chamber of Commerce publications. The General Rules issued by HKAB provide rules on the responsibilities of respective parties where more than one party is involved in a transaction, and guidelines on minimum charges in relation to import / export financing, guarantees and securities business.

31. HKAB’s Organization and Governance The Member Services Committee provides recommendations to enhance services to members, plans and oversees the implementation of the approved plans. The Taxation Committee reviews fiscal and tax issues affecting banks and undertakes drafting of submissions and initiates issues requiring industry lobbying.

32. HKAB’s Organization and Governance The Technical Operations Committee oversees the clearing and settlement systems for inter-bank payments and monitors operational or technical development affecting banks. The Wholesale Banking Committee provides forum to exchange views on issues of common interest to wholesale banks and recommends guidelines and best practices for and reviews legislation and regulations affecting wholesale banks.

33. HKAB’s Organization and Governance The Code of Banking Practice Committee is a joint committee of HKAB, HKMA and the Deposit-taking Companies Association (DTCA) established to provide guidance on application of the Code of Banking Practice and to undertake regular review of the Code having regards to relevant market developments. The Code of Banking Practice is issued jointly by HKAB and DTCA, and endorsed by HKMA, aims to promote good banking practices by setting out the minimum standards that authorized institutions should comply when they provide services to personal customers.

34. Code of Banking Practice The Code of Banking Practice covers : • Terms and conditions of accounts • Fees and charges of accounts • Use of customer information • Compliance with the relevant ordinances for the promotion of equal opportunity • Bank marketing • Handling customer complaints • Residential mortgage financing • Card services • Methods of recovery of loans and commissioning of debt collection agencies • Electronic banking services

35. HKAB’s Organization and Governance The Bankruptcy Working Group is a joint working group of HKAB, DTCA and the HKSAR Licensed Money Lenders Association and The Finance Houses Association of Hong Kong Ltd. established to provide a forum to discuss and consider personal bankruptcy related issues affecting the financial industry.

36. HKAB’s Organization and Governance The Working Group on Commercial Credit Reference Agency is a joint working group of HKMA, HKAB and DTCA established to advise the financial industry on the setting up of a voluntary Commercial Credit Reference Agency for the provision of credit information relating to small and medium-sized enterprises.

37. HKAB’s Organization and Governance The Hong Kong Interbank Clearing Ltd.(HKICL), established in 1995, is equally owned by the HKMA and HKAB. HKICL provides interbank payment clearing and settlement service to licensed banks and restricted licence banks, with the Clearing House Rules governing the related operations and liabilities of participants.

38. HKAB’s Organization and Governance The HKAB has issued Rainstorm and Typhoon Guidelines to member banks which lay down special contingency measures that banks will follow in adverse weather conditions. There are also a number of non-mandatory guidelines on banking, operational, legal and technical matters which are of common interest to member banks.