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The concept of a capital to risk assets ratio is widely accepted
internationally, but there is no uniform standard. The Bill sets a minimum
ratio of 5%, but the Commissioner has the power to increase the ratio for
particular institutions to not more than 8% in the case of banks, and 10%
in the case of deposit-taking companies - this discretionary requirement
is to provide flexibility due to such differences as the quality and nature
of individual institution's asset portfolios. A higher upper limit of 10% for
deposit-taking companies is considered prudent: there is a wider range of
quality of the companies in this sector.
Breach of the ratio will not of itself be an offence. But failure to
report the breach or to take remedial action required by the Commissioner
will be an offence.
This new requirement on capital adequacy will not apply to Hong
Kong branches of foreign institutions. In accordance with accepted
international practice, supervision of a deposit-taking institution's
capital adequacy is the responsibility of the authorities in the place where
the institution is incorporated. Branches of foreign institutions are
licensed in Hong Kong only if they are incorporated in countries the
monetary authorities of which exercise effective supervision. There is,
therefore, no need for the capital adequacy provision in the legislation
here to cover them.
Since this capital to risk assets ratio is new, and will place
substantial requirement on some of the institutions concerned, I envisage
that a reasonably long period, say, two years, will be allowed before
bringing it into effect.