Bank Licensing
Article for the Wah Kiu Yat Po
Banking, Finance & Investment Review of July 1980
by Commissioner of Banking
Prudential Supervision of Banking and Deposit-taking in Hong Kong
In 1964 a new Banking Ordinance was enacted which, apart from Introducing the concept of prudential supervision; declared vold all banking licences Issued under previous legislation. Banks which existed at that time were required to apply for licences under the new law if they wished to continue to carry on banking business. This enabled the licensing. authority to take a fresh look at the situation and not to grant licences to some previous holders such as companies whose main business was not in fact banking.
Shortly afterwards, the events of 1965 had a significant effect on bank licensing policy for many years to come; there were bank runs in Hong Kong in 1965, which resulted in a redistribution of deposits amongst some of the licensed banks. Certain of the locally incorporated banks needed liquidity loans to allow them to continue to function. All such, loans have long since been repaid and the banks themselves subsequently bacaome strong and healthy members of the business community. However, the uncertainty of events at that time, fed to the Introduction of a moratorium on the grant of banking licences, to allow time for consolidation. The moratorium continued until 1972, when it was replaced by a limited moratorium and a foreign bank was granted a licence, Whereas It was envisaged that a number of banks would” be licensed under the new policy, In fact, this did not prove to be possible and the full moratorium was reinstated at the end of 1974.
The next change came in March 1978 when the moratorium was eased and favourable consideration was given to applications from foreign banks which met three criteria: the applicant was incorporated In a country whose monetary authorities exercised effective supervision and had, where necessary, approved the establishment of a branch in Hong Kông; the applicant was of substantial size: total assets, net of contra Items, exceeding the equivalent of US$3,000 million; and some form of reciprocity was available to Hong Kong banks In the applicant's country of Incorporation. The licensing authority naturally reserved the right not to grant a licence when to do so would be against Hong Kong's Interest, notwith- standing that an applicant met the three criteria. In addition, licences were subject to the condition that business could .... only be conducted from one office in Hong Kong.-
Subsequently, In August lest year, the grant of licences was suspended so that the criteris to be applied to future applicants could be reviewed. At that time, 41. banks from 12 countries had been licensed, making a total of 115 licensed banks in Hong Kong from 20 countries around the world. It is clear that, with the passage of time and the rapid growth of banks' balance sheets in US$ terms, an Increasing number of banks are becoming able to meet the criteria laid down, and some bankers expect the licensing authority to increase the size criterion when licensing once more recommences. Registration of deposit-taking companies
Prior to the enactment of the Deposit-taking Companies Ordinance In 1976, there were reports of some 2,000 finance companies In Hong Kong. This figurë, arose from an earlier estimate of 1,500, which Itself was the product of a crude system of classification of newly incorporated comapnies. At the end of the transitional period in 1976 on the Introduction of the Ordinance there were 165 registered deposit-teking companies, which figure has now grown to 273. on different from a system of licensing. Under the latter, the licensing authority selects system of
registration is
suitable applicants to whom licences are granted. Under a system of registration, provided the applicants comply with the basic requirements, registration is virtually automatic, In the case of deposit-taking, thesa basic requirements are that the applicant is an Incorporated company, with the minimum prescribed capital and an acceptable memorandum of association. A deposit-taking company may not use the word “bank”? În any form or in any description of its business. It may not accept deposits of less than a prescribed sum from an Individual customer; the amount presently being HK$50,000! In addition, it may not perform banking business as defined In the Banking Ordinance, for which a banking licence is required. Capital adequacy
An important bench-mark of banking supervisors around the world is capitai adequacy. By limiting the amount of business in which a bank may engage by reference to the size of its capital, the bank. Is required to increase its capital to take account of inflation and to enable it to expand its operations. A more recent move, as some of you may be aware, is the consolidation of banks' balance sheets, by the inclusion of subsidiary companies (especially those engaged in off-shors business) before determining the adequancy of capital.
The approach In Hong Kong has so far been to require banks to maintain a minimum paid up capital, to build up published reserves out of published profits and to encourage the creation of Inner reserves, which are generally not permitted elsewhere. Deposit-taking companies are also required to maintain a minimum issued and paid up capital. The minimum" capital specified in the Banking Ordinance now appears very small. In relation to the present-day size of the many banks incorporated In Hong Kong, and Is generally out of line with the actual capital which the banks themselves have found to be necessary to support their operations. Steps are in hand to propose an Increase in the minimum capital for licensed banks. The possibility of linking the minimum capital to the overall size of the bank is also being examined; as Is the adequacy of the minimum capital requirements for deposit-taking companies.
Minimum liquidity
- Liquidity of licensed banks is measured by taking the average position during the month at the close of business every Wednesday. There are two minimum levels of liquidity which a bnak is required to maintain. One Is bat at: 15% of deposits and the other at 25% of deposits. The 25% level Includes the liquid assets which form the 15% level. Basically, the 15% Is super-liquid (demand or 24 hour money) whereas the 25% level also Includes 7 day money. The super-fiquid category Includes cash, gold and demand and call money at other banks. The second category Includes monay at short. notice at other banks, export bills of exchange which are either payable at sight or, if drawn at a usance, are discountable In the countries on which they are drawn, and a few Government or Government-guaranteed securities which are deemed to be realisable with 7 days.
Part of the liquidity of certain banks Is In the short term Inter-bank- market. The general pattern of this market is for locally Incorporated banks to place some of their liquid funds with foreign banks in Hong Kong. To the extent that: such foreign banks borrow in this market, they must deduct in full these short term Inter-bank liabilities from their liquid assets in calculating their own banks? Ifquidity under the Banking Ordinance.
Since January 1980, deposit-taking companies have also been required to maintain minimum ¡lquidity. This is set at 30% of deposits repayable within 7 days (including time deposits which the company is prepared to repay ahead of maturity) and 16% of longer-term deposits, 60% of the aggregate holding of minimum liquid assets is required to be in super-liquid form,
With the Introduction of minimum liquidity for deposit-taking companies, the relationship between banks and.. deposit-taking companies has changed; from a banker/customer relationship to a market relationship! This change erises from shot-term deposits of banks with deposit-taking companies, as well as short-term deposits of deposit-taking companies with banks, qualifying as liquid assets. In each case, the bank or deposit-taking company receiving the short- term deposits is required to maintain 100% liquidity in respect of such short-term liabilities.
In addition, the list of specified liquid assets for both banks and deposits-taking companies has been extended to Include certificates of depsolt issued outside Hong Kong, and such money market instruments as the Financial Secretary may spacity.
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