CONFIDENTIAL
XCC(92)152
The 'Hong Kong ownership' criterion
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The 'Hong Kong ownership' criterion, introduced in 1981, is largely intended to prevent foreign banks, otherwise ineligible for a full banking licence, from circumventing criteria applicable to them and obtaining banking licences through their locally incorporated subsidiaries. The 1989 review recommended removal of the criterion mainly on the grounds that -
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(a)
with an increasing number of local companies seeking to change their country of domicile and an increasing number of Hong Kong people acquiring foreign passports, the interpretation of what constitutes 'Hong Kong ownership' has become more difficult; and
(b) with the introduction of the RLB category, it is doubtful whether there would be much incentive for foreign banks, most of whom are interested in wholesale rather than retail business, to enter the local market through the backdoor route.
The RLB survey has indeed confirmed general satisfaction with the RLB category which has been successful in attracting foreign banks, which cannot meet the size criterion for a full banking licence, to branch into Hong Kong. However, this could equally well argue against the need to change the present criterion, which does serve the purpose of restricting the potential number of foreign-owned, but locally incorporated, entrants into the licensed bank category.
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The previously suggested replacement criterion of excluding applications from subsidiaries of foreign banks would help to restrict potential entrants. But it would also create an apparent anomaly by allowing subsidiaries of foreign non-bank owned companies to become licensed banks, providing they meet the other licensing criteria. Although the proposed increased size criteria are a helpful protection, they may not be proof against a determined applicant which set out to boost its balance sheet size.
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Another way of avoiding the definitional problems would be to drop the beneficial ownership criterion entirely. However, there is the danger that foreign banks with local subsidiaries might be tempted by the substantially lower size criteria for such institutions and the attraction of
Executive Council
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