HK_banking_-_regulatroy_framework

Money and Banking

2011-2012 First semester PPT on Banking Industry in HKUIC Dr. Vincent Kwan 1

Financial Services Industry and Regulation in Hong Kong

Why are banks regulated? Protecting your money (or all depositors’ money) in banks is an important reason that public wants regulators to monitor how banks operate. Failure in banks have greater adverse effects on the economy. Failure in an inpidual bank may cause trouble to another bank or banks - system-wide banking failures, and possibly contraction in money supply or in the economy.UIC Dr. Vincent Kwan 2

Existing banking regulatory system in HK is aimed at protecting the well-being of the market participants and the general public. HKMA - HKMA’s primary objectives in the area of banking supervision are to provide a measure of protection to depositors and to promote the stability and effective working of the banking system. HKMA also seeks to maintain an environment in which AI retain the ability to operate on a competitive and commercial basis.

UIC Dr. Vincent Kwan

The three-tier financial system in Hong Kong First introduced in 1981, later revised in 1989. Bank crisis happened in the 1960s, Hong Kong Exchange Bank Association set up an Interest Rate Agreement (IRA) in July 1964. The HK Government set up the Hong Kong Association of Banks (HKAB) to replace the Hong Kong Exchange Banks Association in January 1981. All banks were then required to follow the Interest Rate Agreement set by HKAB. This IRA was completely phased out effective July 2001.UIC Dr. Vincent Kwan 4

IRA set the interest rate ceiling for bank deposits to avoid excess and unsafe competition among banks. Rapid economy growth in 1970s & 1980s, Finance companies flourished. Deposit-taking Companies (DTC) Ordinance enacted in 1976.

The government amended the legislation in 1981 to create the “three-tier financial system” to enhance the supervision of the deposit-taking companies.

UIC Dr. Vincent Kwan

The three-tier system First version (1981) Licensed Banks, Licensed Deposit-taking Companies and Registered Deposit-taking Companies. Revision in September 1989 Licensed Banks, Restricted License Banks and Deposit-taking Companies (DTCs). LDTC became RLB; RDTC became DTC. The minimum paid-up share capital requirements were generally increased to provide more protection to depositors.UIC Dr. Vincent Kwan 6

Banking regulation in Hong Kong The regulation and supervision of banks in Hong Kong is based principally on BO 1997 and 1999.

Predecessors - BO 1948, 1964 and 1986. BO 1999 is considered as further explicit empowerment of the Hong Kong of the Hong Kong Monetary Authority to supervise the banking industry. Provides a foundation for the current banking regulation and measures to promote the general stability and effective working of the banking system. HKAB is a statutory body. All LBs have to join a

s member. UIC Dr. Vincent Kwan

General background to the Banking Ordinance

BO 1948 - covered limited areas: licensing, registration and publication of financial statements.BO 1964 - introduced the office of the Commissioner of Banking. Stricter banking rules and requirements were imposed, such as the minimum liquid asset, reserves, set-up capital as well as restrictions to personal loans related to banks. Early 1970s, number of non-bank deposit-taking institutions increased rapidly. They also created an “unfair” competition.

DTC Ordinance was enacted in 1976 to regulate FIs. It required all DTCs to be registered with the government. Requirements such as minimum capital paid-up and allowable deposit received from the public were imposed.

UIC Dr. Vincent Kwan

Several amendments were made in 1978 and 1981. Amendment in 1981 pided FIs into three categories: LB, LDTC and RDTC, the old three tier financial system. A new Banking Ordinance was enacted in 1986 to replace the former Banking Ordinance and DTC Ordinance. Much more power was granted to the Commissioner of Banking (HKMA after 1993) over auditing, management appointments, granting loans, capital adequacy and liquidity of financial institutions. Minimum capital adequacy ratio and liquidity ratio were added under the new Ordinance.UIC Dr. Vincent Kwan 9

Capital adequacy ratio (CAR) is a ratio of the total capital base assets to the risk assets. It is imposed to control the exposure of a bank’s investment in its assets relative to its capital base. Liquidity ratio is the ratio between assets that may be liquidated and qualifying liabilities. It is used to maintain a relative liquidity to meet the withdrawal of funds of depositors. Major features of the Banking Ordinance The Banking Ordinance requires AIs to maintain adequate liquidity and capital, adhere to limitations on loans, and submit required financial information to the HKMA periodically.UIC Dr. Vincent Kwan 10

Capital Adequacy The internationally accepted capital adequacy framework proposed by the Basle Committee on Banking Supervision in 1988 has been applied in Hong Kong since the end of 1989. A minimum CAR of 10% is required for locally incorporated banks in Hong Kong since the financial crisis in 1997. HKMA reviewed the other locally incorporated AIs (i.e. RLBs and DTCs) in 2000, and raised the minimum CAR to be observed by these institutions to 10% or above, consistent with the minimum CAR applicable to locally incorporated banks.UIC Dr. Vincent Kwan 11

Liquidity Ratio Liquidity Ratio measures the adequacy of an institution’s liquidity. The ratio is calculated as the ratio of liquefiable assets to qualifying liabilities. Based on HKMA’s definition, the liquefiable assets include marketable debt securities and loans repayable within one month subject to their liquidity conversion factors, whereas qualifying liabilities mean all liab

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