TNAG-2754-FCO40-3971-Business-matters-in-Hong-Kong-acquisition-of-Midland-Bank-by-1993 — Page 63

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BANKING SUPERVISION DIVISION

Telephone: 071-601 5005

John Gieve Esq

HM Treasury

Parliament Street London

SW1P 3AG

te

BANK OF ENGLAND Threadneedle Street

London

EC2R 8AH

7 January 1993

Mrs Lumix

Mr Grey

Mr Futting / Miss Willie

Mr Milagre

Dear John

HSBC HOLDINGS PLC

COMFORT LETTERS

You will recall that at the time of the talks over HSBC taking over Midland, the question of comfort letters was discussed. Whilst the Bank accepted that HSBC Holdings plc should give a comfort letter to the Hong Kong Commissioner of Banking in respect of HSBC Ltd (the locally incorporated bank in Hong Kong) and its subsidiaries, we wanted there to be no misunderstanding either pre or post 1997 that there could be circumstances (unspecified) in which the Bank, as lead supervisor of the group, would prevent HSBC Holdings from fulfilling its commitment in the letter of comfort.

of course, neither the Bank nor the current incumbents in the Hong Kong banking commission, hope that this will ever have to be triggered, but both sides accept that there is a need for this to be spelled out. After some discussion between ourselves, the Hong Kong Commissioner of Banking and HSBC Holdings, we have concluded that the best way forward is as follows.

There will be a "standard" comfort letter from Holdings to the Hong Kong Commissioner of Banking re HSBC Ltd, which will be identical to those provided by the parents of other Hong Kong banks except for an additional clause (underlined in the enclosed version) requiring Holdings to consult the Bank. This will be accompanied by a side letter from the Bank to the Financial Secretary, which states that there could be circumstances in which Holdings will not be held to its undertaking to support HSBC Ltd. A third letter from Holdings to the Hong Kong Financial Secretary acknowledges the commitments given by HSBC Ltd in respect of the quasi-central banking functions that HSBC Ltd provides for the colony, and gives certain undertakings if Holdings were to dispose of its interest in HSBC Ltd. Copies of the proposed letters are attached.

Letters on this basis will be prepared by the various parties very shortly and I would be grateful if you could keep other departments, including the FCO, informed as you think necessary.