Banking Ordinance - An Overview of the Regulatory Provisions
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.
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.
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.
follows concerns licensed banks and assumes that the bank has fulfilled all the
requirements for obtaining a licence.
Restrictions on the carrying on of banking and deposit taking business and
regulation of money brokers and issue of stored value cards
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)).
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:
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
or collecting cheques drawn by or paid in by customers.
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
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.
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".
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).
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
Stored value cards
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.
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)).
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
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.
Use of the word "bank"
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).
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.
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).
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.
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.
capital includes certain revaluation reserves, latent reserves, general
provisions to the extent not utilised, perpetual subordinated debt and
irredeemable cumulative preference shares.
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).
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)).
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
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.
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).
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).
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
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)).
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
must report the failure to meet capital adequacy ratios to the Monetary
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).
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
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).
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.
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).
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.
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
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).
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).
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)).
Controllers, chief executives, directors and employees
Restrictions on persons becoming controllers of banks
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.
majority shareholder controller is one who with any associates controls
more than 50% of the voting power at a general meeting of a bank.
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.
indirect controller is one with whose instructions the directors of a
bank are accustomed to act (other than a professional adviser).
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)).
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)).
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)).
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
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)).
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
transfer of shares held by majority and minority shareholder controllers;
exercise of their voting rights; and
payment of dividends or other distributions including bonus shares to such
shareholders other than in a liquidation (s.70B(3)).
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)).
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)).
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
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
Restrictions on persons becoming chief executives, directors or employees
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)).
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
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
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
Restrictions on conduct of business
Limitations on loans
Loans against security of own shares
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.
Loans to any one person
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.
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.
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
Limitations on advances to directors of banks
Hong Kong incorporated bank may not make any unsecured facilities exceeding in
aggregate 10% of the capital base of the bank available to:
or their relatives;
responsible for approving loan applications or their relatives;
controllers (other than authorised institutions or approved banks) or their
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
individual or entity of which any director or relative or controller or
relative is a guarantor (s.83).
capital base is given the same meaning as for the determination of capital
adequacy ratio (see paragraph 3.1 above).
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)).
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.
of the interesting features of this restriction is the very broad definition of
"relative" (s.79(1)). This
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;
immediate descendant (i.e. children) and spouses or former spouse of the
brother, sister, aunt or uncle, nephew or niece or first cousin; and
spouse or former spouse, immediate ascendent of a spouse or former spouse
and any brothers or sisters of a spouse or former spouse.
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)).
Limitation on advances to
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
Limitation on advances or deposits with foreign banks
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.
Limitation on shareholdings
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
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.
Limitation on acquisition of share capital in companies
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)).
Limitation on holding
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
is perhaps particularly important in Hong Kong where land values are high and
sometimes change erratically.
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)).
and non-consolidated basis
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).
Establishment of branches and representative offices and regulation of overseas
banking corporations and sales of businesses
Control over establishment of local branches and local
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
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).
Control over establishment of local representative offices
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).
Control over Hong Kong incorporated banks establishing an overseas branch or
overseas representative office
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).
Control over the establishment of an overseas banking corporation
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).
Restrictions on sale of banking business
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).
Provision of information and publication of accounts
Provision of information
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)).
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)).
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
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)).
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).
bank which makes any changes to its memorandum or articles or other constitution
document must inform the Monetary Authority within 30 days (s.65).
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).
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)).
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.
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).
of accounts and information relating to financial affairs
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)).
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)).
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.
Principal powers of the Monetary Authority
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.
of banking licence
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
bank no longer fulfils the requirements for registration;
bank is likely to be unable to meet its obligations;
bank has failed to provide material information required under the Banking
Ordinance or has provided false information;
bank has breached a condition attaching to its licence;
objection is made to a person who has become a controller or chief
is in the interests of depositors that the licence be revoked; and
bank is engaging in practices likely to prejudice Hong Kong as an
international financial centre.
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)).
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)).
Suspension of banking licence
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.
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.
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)).
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)).
only purpose of a suspension would seem to be to enable the bank to sell its
business and licence as a going concern.
Control of banks
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.
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.
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)).
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.
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.
Examination and investigation
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
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
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.
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.
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.
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.
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)).
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.
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