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Author: John Richardson
Service Area: Banking & Finance
Date: February 2001
Country: Hong Kong

 

The Banking Ordinance - An Overview of the Regulatory Provisions

SUMMARY OF CONTENTS

  1. Introduction

  2. Restrictions on the Carrying on of Banking and Deposit Taking Business and Regulation of Money Brokers and Stored Value Cards

  3. Controllers, Chief Executives, Directors and Employees

  4. Financial Ratios

  5. Restrictions on Conduct of Business

  6. Establishment of Branches and Representative Offices and Regulation of Overseas Banking Corporations and Sales of Businesses

  7. Provision of Information and Publication of Accounts

  8. Principal Powers of the Monetary Authority

  9. Conclusion

1. Introduction

The Banking Ordinance as it now exists on the statute book is the legislation which deals in consolidated form with the regulation of banking and deposit taking business in the Hong Kong Special Administrative Region ("Hong Kong").  It does this by restricting the business of banking and deposit taking to institutions which have been licensed or registered as a bank, restricted licence bank or deposit taking company.  Once an institution is licensed or registered, the Banking Ordinance provides lengthy and detailed provisions for regulating the affairs of such organisations with an overall view of protecting depositors and preserving the stability of the banking system.  It does not regulate lending as such, save as part of the regulatory regime.  Regulation of lending is contained in the Money Lenders Ordinance which is intended to regulate lending at street level and loan sharking activities.  Lending by pawnbrokers is regulated by the Pawnbrokers Ordinance.

As bank regulation has developed over the last 20 years, the regime of the Ordinance has become more complex such that it has become a difficult piece of legislation for a banker to get to grips with.  Changes over the years have been reactive to problems in Hong Kong,  international trends (e.g. the Basle Capital Concordat and the amendments to it) and new developments in the banking industry.  The Banking Ordinance is under continuing review and, on average, major amendments are made every two or three years.

As with most regulatory legislation, large discretions and wide powers are given to the Monetary Authority but the Banking Ordinance does contain extensive checks and balances in the form of requirements to give reasons for regulatory action, rights of hearing, rights of appeal and requirements to consult the Financial Secretary.  These checks and balances are probably more extensive than those seen in other regulatory legislation.  This is due in part to the detailed consultation process with the banking industry, through The Hong Kong Association of Banks, each time there is any proposed amendment to the Banking Ordinance.  In addition to the Banking Ordinance itself, there are very lengthy guidelines issued by the Monetary Authority.  These do not have statutory effect as such but are illustrative of the manner in which the Monetary Authority will exercise his rights and discretions.

What follows concerns licensed banks and assumes that the bank has fulfilled all the requirements for obtaining a licence.

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2. Restrictions on the carrying on of banking and deposit taking business and regulation of money brokers and issue of stored value cards

2.1 Banking business

The restrictions contained in the Banking Ordinance are on the carrying on of banking business and the carrying on of the business of taking deposits.  Only licensed banks may carry on banking business (s.11) and (with certain exceptions set out in s.3(1)) only licensed banks, restricted licence banks and registered deposit taking companies may carry on the business of taking of deposits (s.12).  In the case of restricted licence banks or deposit taking companies, their ability to take deposits is restricted by reference to the amount and the term of the deposit.  A restricted licence bank may not take a deposit of less than HK$500,000 (s.14(1)(b)) and a deposit taking company may not take a deposit of less than HK$100,000 (s.14(1)(a)).  In addition a deposit taking company may not take a deposit of less than 3 months (s.12(2)).  Banks are under no such restriction.  Also, the restriction on the taking of deposits does not apply to deposits taken from banks, restricted licence banks, deposit taking companies, foreign banks, money lenders or pawnbrokers (s.3(2)). 

Turning to the restriction on the carrying on of banking business, the definition of this term (s.2) is the carrying on of the business of either:

  • receiving from the general public money on current, deposit, savings or similar account repayable on demand or within less than 3 months or on notice of less than 3 months; and/or

  • paying or collecting cheques drawn by or paid in by customers.

The definition basically relates to the deposit taking side of a bank's business and, expressed more simply, an institution would be carrying on a banking business if it was operating current or savings accounts or accepting deposits of a duration of less than 3 months.  If an institution is doing this, it must be licensed and if it is not licensed it will incur criminal liability carrying a substantial fine and custodial sentences.

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2.2 Lending business

It is a common misconception that the Banking Ordinance restricts the carrying on of a lending business and somehow restricts this to licensed banks and/or restricted licence banks and/or deposit taking companies.  This is not the case save in respect of certain regulatory provisions which restrict the extent of loans made by licensed banks.  These are dealt with later, see chapter 5 of this brochure.

The principal legislation which restricts the carrying on of a lending business is the Money Lenders Ordinance.  This Ordinance requires persons carrying on the business of a money lender to be licensed and comply with the provisions of the Ordinance which regulate money lending transactions.  A discussion of the Money Lenders Ordinance is outside the scope of this brochure but it is worth noting that there is a list of exempted lenders and exempted loans contained in the First Schedule of the Money Lenders Ordinance which exempts certain persons and transactions from the provisions of the Ordinance.  Licensed banks, restricted licence banks and deposit taking companies are exempted lenders.  Most commercial transactions will fall within one of the exceptions but if they do not there will be difficulty in documenting the transaction given the provisions of the Ordinance.  For the purpose of this brochure, it is sufficient to note that the Money Lenders Ordinance does not regulate money lending business carried on by banks, restricted licence banks or deposit taking companies or, as they are described in the Banking Ordinance, "authorised institutions".

2.3 Money brokers

No person may act as a money broker unless that person has been approved by the Monetary Authority (s.118A(1)).  The definition of money broker is a detailed one.  A money broker is a person who negotiates, arranges or facilitates the making of deposits, the purchase or sale of currency or the purchase or sale of certain designated instruments between persons, one of which is a bank, licensed bank or deposit taking company and acts as the agent of one or more of the persons who are parties to the arrangement (s.2).

It is worth noting that a bank, restricted licence bank or deposit taking company is not required to be approved under the Banking Ordinance (s.2 see definition of "money broker") before it may act as a money broker.  Also, the Monetary Authority may designate persons or classes of persons as being within or not within the definition of money broker (s.2(14)).

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2.4 Stored value cards

The Banking Ordinance regulates the issue of certain kinds of stored value cards.  The cards which are subject to regulation are those which store the value of money paid by the holder to the issuer of the card against an undertaking by the issuer of the card that on production of the card to the issuer or a third party, the issuer or the third party will supply goods or services.  These kinds of card are described in the Banking Ordinance as multi-purpose cards and are to be distinguished from single purpose cards which only contain an undertaking by the issuer (and not by third parties) to provide goods or services.  Single purpose cards are not subject to regulation under the Banking Ordinance.

Only banks, restricted licence banks or deposit taking companies which have been authorised by the Monetary Authority for that purpose may issue or facilitate the issue of multi-purpose cards (s.14A(1)).  This is a separate authorisation from that given to a bank, restricted licence bank or deposit taking company (s.16(3A)).

The Monetary Authority also has power to designate a stored value card or a class of stored value cards not to be a multi-purpose card for the purpose of the Banking Ordinance thereby taking such cards outside the ambit of the Banking Ordinance (s.2(14)).

2.5 Advertisements

The Banking Ordinance restricts the publication of advertisements containing invitations to the public to place a deposit.  Such advertisements may only be made in respect of deposits placed with banks, restricted licence banks or deposit taking companies (s.92).  There are exceptions for advertisements in respect of certain certificates of deposit, bills of exchange or other debt securities issued or guaranteed by certain substantial entities e.g. approved overseas banks, multilateral agencies (e.g. the Asian Development Bank, the World Bank and the European Bank), certain exempted bodies (e.g. the Hong Kong Government, MTRC and KCRC) and certain major listed companies.  There are also exemptions in respect of advertisements approved by the Securities and Futures Commission under the Protection of Investors Ordinance and advertisements complying with the rules of the Stock Exchange.  Finally, there is an exception in favour of advertisements for the placing of deposits outside Hong Kong which comply with the Fifth Schedule of the Banking Ordinance.

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2.6 Use of the word "bank"

There are also restrictions against any person using the word "bank" or any of its derivatives in English or Chinese in its name or description or any representation that a person is carrying on a banking business (s.97) without the consent of the Monetary Authority.  This restriction does not apply to a licensed bank, or the central bank of any foreign jurisdiction or the representative office of a foreign bank (as long as in the use of the name it also uses the term "representative office" in conjunction with, and with the same prominence as, the corporate name).

There are also relaxations for restricted licence banks which may use the word "bank" in their corporate name if they are incorporated outside Hong Kong with that name and are banks in their place of incorporation, as long as they also use the term "Restricted Licence Bank" in conjunction with the corporate name and with the same prominence (s.97(4)).  Also, restricted licence banks are entitled to use certain descriptions of themselves which will not violate the restriction (s.97(3)).  These are "restricted licence bank", "merchant bank", "investment bank" or "wholesale bank".  The Monetary Authority may permit other descriptions to be used.

3. Financial ratios

3.1 Capital adequacy ratio

Part XVII of the Banking Ordinance and the Third Schedule provide for capital adequacy.  All banks incorporated in Hong Kong must have a capital adequacy ratio of at least 8% (s.98(1)).  Note that this only applies to Hong Kong incorporated banks but in practice foreign banks will be subject to a similar ratio under their own domestic law following the recommendations of the Basle Committee.  Capital adequacy for Hong Kong purposes is calculated pursuant to the detailed provisions of the Third Schedule of the Banking Ordinance and this provides a complex means of calculation.  It involves expressing as a percentage the ratio of the capital base of a bank to its risk weighted exposure (Third Schedule, paragraph 2).

The purpose of the capital adequacy ratio mechanism is to require assets regarded as having a comparatively high risk and off balance sheet items to be covered in part by capital.  It has the effect of controlling the gearing of a bank.

  • Capital base is divided into core capital and supplementary capital.  Core capital is share capital (other than shares issued through capitalisation of property revaluation reserves), share premium account, credit on profit and loss account and certain capital reserves less the book value of goodwill.  This amounts to capital in a strict accounting sense.  

Supplementary capital includes certain revaluation reserves, latent reserves, general provisions to the extent not utilised, perpetual subordinated debt and irredeemable cumulative preference shares.

Certain of these categories are subject to limitations and more detailed descriptions (see Third Schedule, paragraph 3, Category I and Category II).  Supplementary capital may not exceed core capital (Third Schedule, paragraph 3, Category II proviso).

There is required to be deducted from capital base the value of shareholdings held by the bank in the subsidiaries and holding companies of the bank, the value of loans to, shares and debentures issued by, and guarantees of the liabilities of, companies connected to the bank (where the Monetary Authority believes the shares or debentures were not acquired, or the loans were not made, in the ordinary course of business), the value of shareholdings in companies where the bank holds more than 20% of the share capital of the companies concerned and the value of shares in, or debt securities of, another bank unless otherwise agreed by the Monetary Authority (Third Schedule, paragraphs 3(A) - (D)).

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  • The risk weighted exposure for on balance sheet items is calculated by looking at the value of all the different kinds of asset listed in Table A of the Third Schedule and applying to each kind of asset the risk weight referred to in Table A.  Different kinds of asset are given different risk weights ranging between 0% - 100% depending on the extent to which they might be regarded as being at risk. 

A risk weighting of 0% indicates that the asset is not at risk and therefore should not feature at all in the calculation of risk weighted exposure.  Examples of such assets are cash, certificates of indebtedness of the Hong Kong Government or Governments of country members of the OECD.  These assets do not therefore need to be supported by any capital base because they are not at risk of loss.

Some assets by contrast have a 100% risk weight e.g. loans to non-banks (other than those secured by residential mortgages).  This would include all unsecured commercial loans and overdrafts or loans secured by assets other than residential property.  Also given a 100% risk weighting are real property, plant, equipment or fixed assets.  The result of having an asset with a 100% risk weighting is that for every HK$100 of asset there must be HK$8 of capital base.  

There are different weightings of assets between 0% and 100% broadly in proportion to the risk taken by the bank in holding the asset concerned.  The most important for banks domestically will be residential mortgage loans which are given a risk weighting of 50%.  Thus for every HK$100 lent on residential mortgage there should be a capital base of HK$4 (Third Schedule, paragraph 4(a) and Table A).

  • The risk weighted exposure for off balance sheet items is aggregated with risk weighted exposure for on balance sheet items for the purpose of calculating capital adequacy ratio.  These items include contingent liabilities, amounts due under letters of credit, exchange rate contracts, interest rate contracts, commitments under asset repurchase agreements, amounts due in respect of partly paid shares, obligations under revolving underwriting facilities, equity contracts and precious metal and commodities contracts.  These items are first required to be converted by a credit conversion factor which varies between 0% and 100% (Third Schedule, paragraph 4(a) and Table B).  Then it is necessary to apply the relevant risk weight to them (Third Schedule, paragraph 4(a) and Table A).

  • Deductions; there is deducted from the total of risk weighted exposure for both on and off balance sheet items the value of any utilised general provision not included in the calculation of capital base.  The rationale is that if an asset is the subject of a provision there is no purpose in requiring it to be supported by capital.  It has in substance been written off (Third Schedule, paragraph 4(b)).

The Monetary Authority may require capital adequacy to be calculated on either a consolidated basis or a non-consolidated basis or both (s.98(2) and (2A)).

The Monetary Authority has power in relation to any bank to vary the amount of the capital adequacy ratio to 12% after consultation with the bank concerned (s.101).

Banks must report the failure to meet capital adequacy ratios to the Monetary Authority (s.99).

The Monetary Authority may also require banks which fail to comply with capital adequacy ratios to take such remedial action as he thinks fit (s.100).

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3.2 Liquidity ratio

Part XVIII of the Banking Ordinance deals with liquidity ratio and this is required to be 25% (s.102).  It applies to all banks whether incorporated in Hong Kong or elsewhere but, in relation to banks operating in Hong Kong and elsewhere, the ratio is calculated only on the basis of the Hong Kong branches (s.102(3)).  The ratio is calculated on a month by month basis and is calculated by comparing the bank’s net weighted amount of its liquefiable assets with its qualifying liabilities (Fourth Schedule, paragraph 2).  Liquefiable assets and qualifying liabilities are calculated in accordance with detailed provisions which appear in the Fourth Schedule to the Banking Ordinance.

  • The weighted amount of liquefiable assets are those which are held in the form of cash, gold, loans due within one month from other authorised institutions or adequately supervised foreign banks (after deducting loans due to other authorised institutions or adequately supervised foreign banks within one month), amounts due under certain export bills due within one month payable under letters of credit or covered by rediscounting facilities, amounts due under certain kinds of marketable debt securities, amounts due under certain kinds of negotiable certificates of deposit, amounts due by way of loan repayments due within one month in respect of performing loans subject to a discount  and certain mortgage loans.  Certain of these items are subject to a discount by virtue of the application of a liquidity conversion factor (Fourth Schedule, Table A).

     

  • Deductions There are deducted from the weighted amount of liquefiable assets the amounts due by the bank under debt securities and certificates of deposit issued by the bank with a term to maturity of not more than one month (Fourth Schedule, Table B).  This produces the net weighted amount of liquefiable assets.

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  • Qualifying liabilities are liabilities due within one month after deducting amounts recoverable from other authorised institutions or adequately supervised foreign banks within one month (Fourth Schedule, paragraph 6).  There are also required to be deducted deposits placed with the bank to the extent they secure advances by the bank to non-bank customers (Fourth Schedule, paragraph 7).

Thus the effect of the liquidity ratio requirement is to ensure that short term liabilities may not exceed 4 times the amount of assets likely to be recoverable in the short term.

The Monetary Authority may require a Hong Kong incorporated bank to calculate its liquidity ratio on a consolidated basis, on a non-consolidated basis or both (s.102(3A)).

As with the capital adequacy ratio there is an obligation to report (s.103) non-compliance and the Monetary Authority may require remedial action to be taken when non-compliance is identified (s.104).

The Monetary Authority may also vary liquidity ratios up or down.  There is no restriction on the right to vary liquidity ratios although an aggrieved party may appeal against such action (s.105).

Related to the requirements as regards liquidity ratios is a particular provision applicable to Hong Kong incorporated banks only which provides that such a bank may not, without the approval of the Monetary Authority, charge its assets to secure an aggregate amount equal to or greater than 5% of the value of the total of its assets (s.106)(1)).

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4. Controllers, chief executives, directors and employees

4.1 Restrictions on persons becoming controllers of banks

The Banking Ordinance contains very detailed provisions regarding persons becoming controllers of banks incorporated in Hong Kong (sections 70, 70A, 70B and 70C).  The provisions cover majority shareholder controllers, minority shareholder controllers and indirect controllers but broadly speaking the same provisions apply to each category of controller.

  • a majority shareholder controller is one who with any associates controls more than 50% of the voting power at a general meeting of a bank.

  • a minority shareholder controller is one who with any associates controls 10% or more but not more than 50% of the voting power at a general meeting of a bank. 

  • an indirect controller is one with whose instructions the directors of a bank are accustomed to act (other than a professional adviser).

The substantive sections contain very detailed procedural provisions which make them difficult to follow but in brief they provide that no one can become a majority shareholder controller, minority shareholder controller or indirect controller unless he has advised the Monetary Authority of his intent to become such a controller and the Monetary Authority has consented or not indicated opposition within 3 months (s.70(3)).  Any consent given by the Monetary Authority may be made subject to conditions including, in particular, conditions for the protection of depositors (s.70(7)).

The Monetary Authority may not object if he is of the view first, that the person concerned is a fit and proper person to be a controller of a bank, secondly, that the interests of depositors or potential depositors will not be threatened and thirdly, that the person concerned is likely to exercise his influence with a view to the business of the bank being carried on prudently (s.70(8)).

There is a right to provide written representations before the Monetary Authority may object to a person becoming a controller or before consent is given which is made subject to any conditions (s.70(10)).  There is also a right of appeal (s.132A(3)).

Similar provisions exist (s.70A) for the Monetary Authority to object to persons who are already majority or minority shareholder controllers or indirect controllers of Hong Kong incorporated banks on grounds that they are no longer fit and proper persons, the interests of depositors or potential depositors may be threatened by such persons or a condition of a consent to become a controller has been breached.

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There is a right to provide written representations before the Monetary Authority may make an adverse decision under this section (s.70A(4)).  Also, there is a right of appeal (s.132A(3)).

Where any provisions regulating majority or minority shareholder controllers are not complied with there is power (s.70B) on the part of the Monetary Authority to restrict:

  • the transfer of shares held by majority and minority shareholder controllers;

  • the exercise of their voting rights; and

  • the payment of dividends or other distributions including bonus shares to such shareholders other than in a liquidation (s.70B(3)).  

Changes are pending which would enable the Monetary Authority to require holders of shares by a majority or minority shareholder controller to transfer them to a nominee of the Monetary Authority (s.70B(3)(e)).

In addition, the Monetary Authority or (in certain cases) any person interested in the shares may apply to the Court for an order for sale of the shares concerned (s.70B(7)).  Once sold, the proceeds of sale (less costs of sale) are paid into Court and held for the benefit of the former shareholders (s.70B(11)).

In the case of an indirect controller who does not have the appropriate authority to be or become such an indirect controller, that person is prohibited from acting as an indirect controller or from giving instructions to the directors of the bank or its parent company (s.70C(2)) and the directors are required to inform the Monetary Authority of the instructions which have been given (s.70C(3)).

These sections clearly contain detailed provisions preventing persons whether as a minority or a majority shareholder or indirect controller exercising any influence over the affairs of a Hong Kong incorporated bank without the Monetary Authority's consent.

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4.2 Restrictions on persons becoming chief executives, directors or employees

All banks must have a Chief Executive and at least one alternate Chief Executive ordinarily resident in Hong Kong (s.74).  A person requires the consent of the Monetary Authority before becoming the Chief Executive in Hong Kong of any bank or a director of a Hong Kong incorporated bank (s.71(1)).  Also, any previous consent which may have been given may on notice be revoked but before a revocation takes effect there is a right to provide written representations.  There is a right of appeal against refusal or revocation of consent to act as a Chief Executive or director (s.132A(1)).

When a person ceases to be a Chief Executive, alternate Chief Executive or director of a Hong Kong incorporated bank, the bank concerned must notify the Monetary Authority (s.72A(2A)).

Changes are pending (s.71C - 71F) which will require banks which have been granted an exemption from certain of the regulatory provisions of the Securities and Futures Ordinance to appoint at least two executive officers to be responsible for the carrying on of the bank’s securities business.  The executive officers so appointed are required to be approved by the Monetary Authority as fit and proper persons and competent to carry out their duties.

As one would expect, more junior employees are not subject to the same kinds of control but they are subject to the limitation that persons who have been bankrupt, entered into a composition with creditors, convicted of a criminal offence involving fraud or dishonesty or involved in the management of the business of a bank which has been wound up or whose licence has been revoked may not be employed without the Monetary Authority's consent (s.73(1)).  Also, any such person may not continue to be employed by a bank after he has become bankrupt, entered into a composition with creditors, been convicted of a criminal offence involving fraud or dishonesty or been involved in the management of the business of a bank which has been wound up or whose licence has been revoked without the Monetary Authority's consent (s.73(1A)).

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5. Restrictions on conduct of business

5.1 Limitations on loans

5.1.1 Loans against security of own shares

A bank may not grant credit facilities against the security of its own shares or (without the consent of the Monetary Authority) against the shares of its holding company, subsidiary or subsidiary of the holding company (s.80).  This is to avoid the situation where the security for a loan is dependent on the solvency of the bank itself (i.e. if the bank becomes insolvent the security will have become valueless so that at the time when the bank needs to rely on its security it has become worthless).  This is most likely only to present a problem for listed banks where they are offered their own shares as security.

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5.1.2 Loans to any one person

A bank incorporated in Hong Kong may not incur financial exposure to any one customer, to different companies within the same group or to an individual and companies controlled by him which exceeds 25% of the "capital base" of the bank (s.81).  The term "capital base" has the same meaning as for the purpose of calculating the capital adequacy of the bank (see "Capital adequacy" at paragraph 3.1 above).  Financial exposure includes loans, credit facilities, shares, debentures and debt securities of a person, other forms of financial exposure specified by the Monetary Authority and a portion of off balance sheet items of such a person as are referred to in Table B of the Third Schedule to the Banking Ordinance e.g. guarantees, letters of credit, note issue or revolving underwriting facilities (s.81(2)).  In relation to off balance sheet items the Monetary Authority may for the purpose of calculating the portion specify a percentage to be applied to the principal amount of such items for the purpose of this section.

In addition to certain discretionary exceptions (ss.81(4) and (5)), there are a number of important exceptions (s.81(6)) including financial exposure to other authorised institutions or those secured by a cash deposit or a guarantee or letter of comfort which in either case is acceptable to the Monetary Authority or securities issued by certain governments.  Other exceptions include the purchase or advance of monies against bills of exchange or documents of title to goods where the holder is entitled to payment for goods exported from Hong Kong, financial exposure to the Hong Kong Government or other approved governments and The Hong Kong Mortgage Corporation Limited and financial exposure to adequately supervised overseas banks or under underwriting or sub-underwriting contracts.  There are also exceptions for shares held by way of security or pursuant to realisation of security or as a result of underwriting or sub-underwriting agreements provided they are disposed of promptly.

The logic of these provisions is clear - to ensure that the solvency of banks should not be put at risk by the failure of a significant customer or counterparty.

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5.1.3 Limitations on advances to directors of banks

A Hong Kong incorporated bank may not make any unsecured facilities exceeding in aggregate 10% of the capital base of the bank available to:

  • directors or their relatives; 

  • employees responsible for approving loan applications or their relatives; 

  • bank controllers (other than authorised institutions or approved banks) or their relatives; 

  • other entities (other than authorised institutions or approved banks) in which the bank, directors or majority or minority controllers or relatives of directors or majority or minority controllers are interested as a director, manager, partner or agent; or 

  • an individual or entity of which any director or relative or controller or relative is a guarantor (s.83).

Again capital base is given the same meaning as for the determination of capital adequacy ratio (see paragraph 3.1 above).

For the purpose of this provision, security is that which, in the opinion of the Monetary Authority, would be acceptable to a prudent banker and to the extent that facilities exceed the market value of any security they should be treated as unsecured (s.79(3)).

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There is an additional restriction (s.83(2)) to the effect that no unsecured advance to any one of the individuals mentioned above (other than an individual of which a director or relative or controller or relative is a guarantor) may exceed HK$1,000,000 and the unsecured advances to individuals mentioned above (other than an individual of which a director or relative or controller or relative is a guarantor) in aggregate must not exceed 5% of the bank's capital base.

One of the interesting features of this restriction is the very broad definition of "relative" (s.79(1)).  This comprises:

  • an immediate ascendent (i.e. mother or father), spouse or former spouse of the immediate ascendent, or brother or sister of such spouse or former spouse;

  • any immediate descendant (i.e. children) and spouses or former spouse of the immediate descendant;

  • any brother, sister, aunt or uncle, nephew or niece or first cousin; and

  • any spouse or former spouse, immediate ascendent of a spouse or former spouse and any brothers or sisters of a spouse or former spouse.

These restrictions are targeted towards limiting unsecured advances made to insiders and, in particular, to persons who are able to approve the proposed advances to a figure of 10% of the capital base and in relation to individuals to 5% of the capital base with a sub-limit of HK$1,000,000 for any one individual.  It was a feature of some of the bank insolvencies of the mid-1980s that large advances had been made to bank officers or related parties which they were not in a position to repay.  The Monetary Authority is able to relax this provision subject to conditions which he may specify (s.83(4A)).

5.1.4 Limitation on advances to employees

Locally incorporated banks and the local branches of foreign banks are not permitted, without the consent of the Monetary Authority, to make unsecured facilities to employees in an aggregate amount for each employee in excess of one year's salary (s.85).  This is a similar kind of restriction to the one described in paragraph 5.1.3 above but far less complex.

5.1.5 Limitation on advances or deposits with foreign banks

The Monetary Authority may restrict, on a discretionary basis, authorised institutions from making advances or credit facilities to, or deposits with, foreign non-Hong Kong licensed banks if he considers it not to be in the interests of the depositors of the bank (s.86).  Again this is directed towards ensuring that a bank does not become excessively exposed to the solvency problems of a particular foreign bank.  The relevant section authorises the Monetary Authority to require the bank not to make any further advances to the relevant foreign bank as well as to demand repayment of any advances which have already been made (s.86(2)).  This requirement may be imposed on both Hong Kong banks and the local branches of foreign banks.

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5.2 Limitation on shareholdings

Section 87 restricts the extent to which Hong Kong incorporated banks may hold shares in other companies.  The restriction is such that the value of such shares must not exceed 25% of the capital base of the institution.  "Value" is determined as book value plus the amount if any unpaid on the shares (s.79(1)).  There are a number of exceptions from this (s.87(2)).  First, shares held as security or on enforcement of security are permitted (as long as the security is disposed of within 18 months of enforcement).  Secondly, shares acquired as a result of underwriting or sub-underwriting commitments are permitted if disposed of within 7 days of acquisition.  Thirdly, there are exempted shares in executor, trustee, nominee or other companies approved by the Monetary Authority which are carrying on functions related to the banking business or the provision of other financial services.  Finally, there is excepted holding of shares in other authorised institutions approved by the Monetary Authority or shares in other companies approved by the Monetary Authority which are not counted in the calculation of capital base.

The rationale here is to limit the extent to which banks can invest in companies which are involved in commercial or speculative enterprises carrying with them a greater risk of failure than that of the ordinary business of banking.

5.3 Limitation on acquisition of share capital in companies

In addition to the restriction on shareholdings in Section 87, Hong Kong incorporated banks may not, without the consent of the Monetary Authority, acquire share capital of a company to a value of 5% of the capital base of the institution (s.87A(2)(a)).  Consent is deemed given to any shareholdings acquired before 18th February, 2000 or where most of the circumstances resulting in the holding occurred before 18th February, 2000 (s.87A(3)).  Conditions may be attached to consents granted or deemed granted under Section 87 (s.87(4)) and consents granted or deemed granted under the section may be revoked (s.87(5)).  There are exceptions for shares acquired as a result of enforcement of security or as a result of underwriting or sub-underwriting commitments if (in the case of shares held as a result of underwriting or sub-underwriting commitments) the shares concerned are disposed of within 7 days of acquisition (s.87(8)).

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5.4 Limitation on holding land

The restriction on the holding of interests in land (s.88) applies to Hong Kong incorporated banks only and is a restriction against holding land having a value in excess of 25% of the capital base of the institution.  "Value" is defined as the current book value of the land (s.79(1)).  The exception to this rule is land which, in the opinion of the Monetary Authority, is held by Hong Kong incorporated banks for the operation of the business or for providing housing or amenities for staff.  In addition, land held by way of mortgage is not counted and neither is land where the bank has entered into possession of it as long as the land is disposed of promptly (and in any event not later than 18 months after entry into possession).

This is perhaps particularly important in Hong Kong where land values are high and sometimes change erratically.

5.5 Aggregate limitations

In addition to the individual limitations on unsecured loans, the restrictions on shareholdings under Section 87 and the restrictions on holding land, there is a restriction (s.90) on the aggregate value of these assets to 80% of the capital base of the bank (s.90).  All the exceptions continue to apply (s.90(2)).

5.6 Consolidated and non-consolidated basis

The Monetary Authority may require that the restrictions described in paragraphs 5.1 - 5.4 above which apply to a Hong Kong incorporated bank will apply on a consolidated basis or a non-consolidated basis or both (s.79A).

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6. Establishment of branches and representative offices and regulation of overseas banking corporations and sales of businesses

6.1 Control over establishment of local branches and local offices

A bank may not establish any place of business (other than its principal place of business or any automated teller machine) without the consent of the Monetary Authority (s.44).

Changes are pending requiring banks which establish offices, other than their principal place of business or any branch, to notify the Monetary Authority of the address of the office, the nature of business carried on at the office and the date of commencement of that business (s.45A).

6.2 Control over establishment of local representative offices

A bank incorporated outside Hong Kong which is not licensed in Hong Kong may not establish a local representative office without the approval of the Monetary Authority (s.46(1)).  Such approval will not be given unless the Monetary Authority is satisfied that the bank concerned is adequately supervised by its supervisory authority (s.46(3)).  Local representative offices are subject to limited supervision by the Monetary Authority (s.47).

6.3 Control over Hong Kong incorporated banks establishing an overseas branch or overseas representative office

A bank incorporated in Hong Kong may not establish an overseas branch or an overseas representative office without the consent of the Monetary Authority (s.49).  Once an overseas branch or overseas representative office is established, the branch or representative office must supply the Monetary Authority with information regarding the assets and liabilities and functions and activities of the branch and the functions and activities of the representative office.  The Monetary Authority also has a right of inspection of the books and documents of the overseas branch or overseas representative office (s.50).

6.4 Control over the establishment of an overseas banking corporation

A Hong Kong incorporated bank or its holding company incorporated in Hong Kong may not establish or acquire a subsidiary company outside of Hong Kong for the purpose of taking deposits from the general public in Hong Kong or elsewhere without the approval of the Monetary Authority (s.51A).

6.5 Restrictions on sale of banking business

A Hong Kong incorporated bank may not enter into any arrangement or agreement for the sale of its banking business without the approval of the Monetary Authority (s.69(1)).  This does not apply to foreign banks.  Also, notice is required to be given to the Monetary Authority of the sale of a banking business or any reconstruction of the capital of a bank incorporated in Hong Kong (s.69(2)).  Clearly, the purpose of this is to control the identities of persons ultimately carrying on banking businesses and is ancillary to the provisions regarding persons becoming controllers of banks (see chapter 4 of this brochure).

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7. Provision of information and publication of accounts

7.1 Provision of information

Monthly returns are required to be made by all banks to the Monetary Authority showing the assets and liabilities of banks and each quarter a return is required to be made relating to the principal place of business and all local branches (s.63(1)).  The Monetary Authority may require the returns to be certified by an approved auditor to the effect that they have been correctly compiled (s.63(3)).

The Monetary Authority may also require an approved auditor to confirm that the bank has systems of control necessary to ensure that information supplied has been correctly compiled, that the bank is in compliance with the main provisions of the Ordinance and, in the case of a bank incorporated in Hong Kong, that the bank maintains adequate provisions for diminution or depreciation of assets including provisions for bad and doubtful debts and for liabilities which will fall to be discharged or for losses which will or may occur (s.63(3A)).

If the conclusion of the report of the auditor is that inadequate systems of control are maintained, details of the extent of the inadequacies must be provided (s.63(3A)(a)).  Also, the report may be required to detail any breaches of the main provisions of the Banking Ordinance; in the case of a bank incorporated in Hong Kong, details of any failure to maintain adequate provisions for diminution or depreciation of assets including provisions for bad and doubtful debts and for liabilities which will fall to be discharged or for losses which will or may occur; and whether any matter affects the financial position of the bank to a material extent (s.63(3A)(b)).

The Monetary Authority also has wide power to request information relating to the parent companies of banks, subsidiaries and subsidiaries of parent companies.  The information required may thus be from companies outside the banking group and includes information for discharge of functions under the Banking Ordinance and for protection of depositors (s.63(2A)).

Banks may also be required to provide information relating to the business carried on by companies in which they have a 20% shareholding, which have common management with the bank, a similar name to the bank, common control with the bank or which act in concert with the bank (s.64).

A bank which makes any changes to its memorandum or articles or other constitution document must inform the Monetary Authority within 30 days (s.65).

There are peremptory obligations to notify the Monetary Authority on cessation of banking business or any likelihood of a bank becoming unable to meet its obligations or suspend payments together with all relevant facts, circumstances and information (ss.66 and 67).

There is an obligation on banks incorporated in Hong Kong to report to the Monetary Authority any civil proceedings commenced against the bank if the proceedings could materially affect the financial position of the bank (s.106(3)).

This regular flow of information to the Monetary Authority's office enables a continued watch to be kept on banks ensuring compliance with other obligations under the Banking Ordinance and enables the Monetary Authority to decide when he may need to exercise other rights of control available to him.

Changes are pending that will require banks to notify the Monetary Authority of their financial year end and not make any change to this without the consent of the Monetary Authority (s.59B).

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7.2 Provision of accounts and information relating to financial affairs

All banks incorporated in Hong Kong are required within 4 months of their financial year end to exhibit a copy of their audited accounts for the year together with a copy of the auditors’ and directors' report thereon at the head office and all local branches (s.60(3)).  The same information needs to be delivered to the Monetary Authority together with a list of companies of which the bank's directors are directors (s.60(4)).

Banks incorporated outside Hong Kong must, within 6 months from the end of their financial year provide copies to the Monetary Authority of the audited annual balance sheet and profit and loss account and directors' and auditors' reports and must exhibit the accounts and reports at their principal place of business and all local branches (ss.60(5) and (7)).  Banks incorporated outside Hong Kong may in lieu of providing the audited annual balance sheet and profit and loss account and directors’ and auditors’ reports thereon to the Monetary Authority, provide similar documents in respect of their holding company on a consolidated basis (s.60(5A)).

In addition, by virtue of s.60A the Monetary Authority may require every bank or bank belonging to a class of banks to publish or disclose information relating to the state of affairs or profit or loss of the bank of such kind or in such manner as he may think fit.  At the time of going to press this section had not yet been brought into effect.

8. Principal powers of the Monetary Authority

8.1 General

In addition to the positive and negative restrictions which apply to locally incorporated banks and licensed banks generally, there are various powers of investigation, search and seizure as well as criminal sanctions applicable to individuals in breach of the Banking Ordinance.  Set out below are a number of important powers which the Monetary Authority has available to him.

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8.2 Revocation of banking licence

The Monetary Authority has a power (s.22) to revoke a banking licence after consultation with the Financial Secretary.  The grounds for revocation are set out in the Eighth Schedule to the Banking Ordinance.  This includes a diverse list of grounds on which the power of revocation may be exercised including:

  • the bank no longer fulfils the requirements for registration;

  • the bank is likely to be unable to meet its obligations;

  • the bank has failed to provide material information required under the Banking Ordinance or has provided false information;

  • the bank has breached a condition attaching to its licence;

  • an objection is made to a person who has become a controller or chief executive;

  • it is in the interests of depositors that the licence be revoked; and

  • the bank is engaging in practices likely to prejudice Hong Kong as an international financial centre.

These provisions are broad and very largely subjective giving the Monetary Authority wide powers of revocation.  The safeguards are however, a requirement to consult the Financial Secretary (s.22(1)), a right of the bank to be informed of the grounds for the revocation and a right to be heard in relation to the proposed revocation (s.23(1)), and a right of appeal to the Chief Executive in Council which may be exercised after a revocation has been proposed but before it becomes final (s.132A(2)).

After revocation of a banking licence, the bank must cease to carry on the business of banking but may continue to hold any deposits already held subject to such terms as the Monetary Authority may stipulate (s.22(4)).

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8.3 Suspension of banking licence

The Banking Ordinance provides for the suspension of a banking licence on a temporary basis for 14 days or for a suspension for a longer period.

A licence may be temporarily suspended after consultation with the Financial Secretary if a right of revocation exists for any of the reasons set out in the Eighth Schedule and either the Monetary Authority considers suspension to be in the interests of depositors or he is advised by the Financial Secretary that it is in the public interest (s.24(1)).  The right of suspension may be exercised without the giving of a right of hearing if the matter is urgent.  There is no right of appeal against a temporary suspension.

Suspension may be made for a period of up to 6 months after consultation with the Financial Secretary if a right of revocation exists for any of the reasons set out in the Eighth Schedule (s.25(1)).  A suspension may be renewed after consultation with the Financial Secretary for a further period of 6 months (s.25(2)).  Suspension is subject to the right to be heard (s.26) and there is also a right of appeal to the Chief Executive in Council (s.132A(1)(a)).

For the duration of a suspension the bank must cease to carry on the business of banking (s.27(1)) but may continue to hold any deposits already held subject to such terms the Monetary Authority may stipulate (ss.24(5) and 25(3)).

The only purpose of a suspension would seem to be to enable the bank to sell its business and licence as a going concern.

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8.4 Control of banks

The most severe rights of control are contained in Part X of the Banking Ordinance.  This provides that if there is an actual or impending insolvency, if the business of the bank is being carried on in a manner likely to be detrimental to depositors or potential depositors, creditors or holders or potential holders of multipurpose cards issued by it, if other provisions of the Ordinance have not been complied with or if the conditions attached to a licence have not been complied with, if a right of revocation of a licence has arisen or if the Financial Secretary considers it to be in the public interest, the Monetary Authority may exercise a number of powers after consultation with the Financial Secretary as follows. 

  • The first is to require the bank to do any thing or take any action he considers fit in relation to the bank's affairs, business and property (s.52(1)(A)).   This is an apparently very broad and almost limitless discretion.  This power enables the Monetary Authority, in the last resort, to direct that a bank should not open for business.

  • The second is to appoint a person to advise the bank in the conduct of the business and to require the bank to seek advice from such person in relation to its affairs, business and property (s.52(1)(B)).

  • The third is to appoint a manager to manage such of the affairs, business and property of the bank as may be specified by the Monetary Authority (s.52(1)(C)).  A manager is entitled to have wide authority to manage the ongoing business of the bank in accordance with specified objectives which the Monetary Authority may make from time to time.  While the appointment of a manager remains in effect, the powers of the chief executive and directors of the institution are displaced.  No action may be taken by any such persons except with the consent of the manager (s.53B).  The intention is to provide for a mechanism whereby a bank may be nursed back to good health or to take action to limit losses to depositors.

  • The final one is to report the circumstances to the Chief Executive in Council (s.52(1))(D)).  Where the matter is referred to the Chief Executive in Council, the Chief Executive has a wide discretion as to what to do including the power to direct the Financial Secretary to present a petition for winding up the bank.

8.5 Examination and investigation

The Monetary Authority has power at any time without notice to examine the books, accounts and transactions of a bank (s.55) and, for the purpose of such examination, the bank must afford access to all relevant documents and provide information and facilities required for the conduct of the examination (s.56).  In addition, a recognised overseas regulatory authority may examine the books of account and documents of a local branch or local representative office of a bank for which the regulatory authority has primary supervisory responsibility (s.68).

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8.6 Auditors

Banks, like other corporate entities, are required to have auditors who are required to audit the accounts in accordance with the Companies Ordinance.  This applies whether or not the bank is incorporated in Hong Kong (s.59(1)).

The Monetary Authority does have the power (ss.59(2) and (3)) after consultation with a bank to require the bank to appoint another auditor approved by the Monetary Authority for the purpose of preparing a report to the Monetary Authority on such matters as the Monetary Authority may require for the exercise of his functions under the Banking Ordinance including a report on the state of affairs or profit and loss or on the systems of control adopted by the bank.  This is at the expense of the bank. 

In addition, historically, auditors generally have been put under an obligation to report matters of concern to them which they have come across during the course of their audit work.  This is now the subject of guidelines issued by the Monetary Authority and by The Hong Kong Society of Accountants.

Reporting by auditors to the Monetary Authority is generally via the bank or at meetings where the bank is present with a representative of the Monetary Authority.  An auditor is relieved of liability for breach of duty of confidentiality arising from reporting of matters to the Monetary Authority (s.61).  It is only however in very exceptional circumstances that auditors will make direct reports to the Monetary Authority without informing the bank and this will arise where for example there is doubt as to the integrity of management, if there is suspicion of fraud or concern as to the competence of the bank's management.

Now changes are pending (s.63A) which will require auditors to report to the Monetary Authority matters which in their opinion adversely affect the financial position of a bank together with their reasons for such opinion.

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8.7 Winding up

The Financial Secretary acting in accordance with a direction of the Chief Executive in Council has the ability to petition to wind up a bank on any of the grounds stated in the Companies Ordinance for winding up or if he is satisfied that the bank should in the public interest be wound up (s.122(2)).

8.8 Changes

Changes are pending empowering the Monetary Authority to make public or private reprimands of a bank which has been granted an exemption from certain of the regulatory provisions of the Securities and Futures Ordinance and which has been guilty of misconduct (s.58A).  These provisions enable the Monetary Authority to exercise a disciplinary role over banks which are carrying on securities business.  This disciplinary role will be carried on in a similar manner to that carried on by the Securities and Futures Commission in respect of other participants in the securities market. 

9. Conclusion

The Banking Ordinance contains a complex set of provisions with which banks must comply.  It is hoped that this brief overview will have provided a comprehensible guide to some of the principal provisions. 

Whilst every effort has been made to ensure the accuracy of this publication, it is intended to provide general guidance and not definitive legal advice.

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