The regulatory framework of banking industry in hong kong

Copyright © 2015 Dr. LAM Yat-fai
EF5063
The Regulatory Framework of
Banking Industry in Hong Kong
Dr. LAM Yat-fai (林日辉林日辉林日辉林日辉博士博士博士博士)
Adjunct Faculty, CityU
Doctor of Business Administration (Finance)
CFA, CAIA, FRM, PRM
E-mail: yatfailam2-c@my.cityu.edu.hk
2:00 pm to 3:30 pm
Saturday afternoon
10 October 2015

Copyright © 2015 Dr. LAM Yat-fai 2
Declaration
Copyright © 2015 Dr. LAM Yat-fai.
All rights reserved. No part of this
presentation file may be reproduced, in any
form or by any means, without written
permission from Dr. LAM Yat-fai.

Outline
Why financial regulations ?
Banking Ordinance
Hong Kong Monetary Authority
Banking policy
Banking supervision

What is financial regulation?
Government’ statuary and non-statuary
controls on business activities in a financial
market in accordance with
laws
expectations for the good of general public

Chicago school of economics
Effective and
efficient
Efficient but
not effective
My
job
Effective but
not efficient
Not effective and
not efficient
Your
job
My moneyYour money

Why financial regulations?
Financial institutions hold customers’ assets
To protect the interests of general public
To prevent systemic risk
To prevent financial issues to evolve into political
issues
To reduce transaction costs
To promote the status of international financial
centre

Segregation of financial regulations
Insurance Companies
Ordinance
Securities and
Futures Ordinance
Banking
Ordinance
Primary law
Office of the
Commissioner of
Insurance
Securities and
Futures
Commission
Hong Kong
Monetary
Authority
Regulator
Hong Kong
Solvency IIIOSCO PrinciplesBasel IIIStandard
European UnionIOSCOBCBSOrganization
International
Insurance
Securities and
futures
Banking

A model financial
regulatory framework
Ordinance
Specialist
regulator
Licensing Policy Supervision
Advisory
committees
Regulatory
legal system
Industry
associations

Regulation vs compliance
Regulator Financial institution
Regulation
Compliance
Lawsand
expectations

Outline
Why financial regulations?
Banking Ordinance
Banking policy
Banking supervision

CAP 155 Banking Ordinance
To regulate banking business and the business of
taking deposits
To make provision for the supervision of authorized
institutions so as to provide a measure of protection
to depositors
To promote the general stability and effective
working of the banking system
To make provision for the supervision of money
brokers
To provide for matters incidental thereto or
connected therewith

Banking Ordinance (1)
Revocation of Authorization5
Authorization4
Banking Business and Business of Taking Deposits to
be Carried on by Authorized Institutions only
3
Appointments, Functions of Monetary Authority,
Reports by Monetary Authority and Power of Chief
Executive to Give Directions
2
Preliminary1
TopicPart

Audits and Meetings11
Powers of Control Over Authorized Institutions10
Overseas Branches, Overseas Representative Offices,
Fees and Overseas Banking Corporations
9
Local Branches, Local Offices, Local Representative
Offices and Fees
8
Transfer of Authorization7
Suspension of Authorization6
TopicPart

Liquidity Requirements16B
Capital Requirements16A
Advertisements, Representations and Use of Title
"Bank"
16
Limitations on Loans by and Interests of Authorized
Institutions
15
Ownership and Management of Authorized Institutions13
Disclosure of Information by Authorized Institutions12
TopicPart

Transitional, Savings and Repeal22
Miscellaneous21
Money Brokers20A
Investigations of Authorized Institutions20
Banking Review Tribunal17A
Codes of Practice for Rules Made Under Section
60A(1), 97C(1) Or 97H(1)
16C
TopicPart

Major functions of the BO
Bank regulator
Banking business and deposits-taking
business
Authorization of institutions
Regulatory framework

Banking business
Receiving from the general public money on
current, deposit, savings or other similar
account repayable on demand or within less
than 3 months or at call or notice of less than
3 months
Paying or collecting cheques drawn by or paid
in by customers

Deposit taking business
Deposit taking business is generally a matter to be
decided on the basis of the facts of each individual
case
The term “business” can generally be said to refer to
activity of a systematic and repetitive nature
BO specifies that if a person took deposits on at least
5 separate occasions within any period of 30 days,
that person shall, in the absence of evidence to the
contrary, be deemed to have been carrying on a
deposit taking business

3-tier licensing system
Licensed bank
Full range of retail and wholesale banking and
deposits taking businesses
21 incorporated in Hong Kong
138 incorporated outside Hong Kong

Restricted licence bank
Deposits taking of HK$500,000 and above
without restriction on maturity
Generally engaged in merchant banking and
capital market operations
15 incorporated in Hong Kong
7 incorporated outside Hong Kong

Deposits taking company
Taking deposits on at least 5 separate occasions
within any period of 30 days
All 23 incorporated in Hong Kong
Including Octopus Cards

Outline
Why financial regulations ?
Banking Ordinance
Banking policy
Banking supervision

Major functions of the HKMA
Promoting the stability and integrity of the
financial system, including the banking system
Maintaining currency stability within the framework
of the Linked Exchange Rate system
Managing the Exchange Fund
Helping to maintain Hong Kong's status as an
international financial centre, including the
maintenance and development of Hong Kong's
financial infrastructure

Banking Departments
Monetary
Authority
Banking
Policy
Banking
Supervision
Banking
Conduct
Enforcement
Sub-legislation
Supervisory
policy manual
Offsite
teams
Onsite teams
Specialist teams
Licensing
Customer
protection
Selling of
investment
products
Complaint
handling
Preliminary
investigation
Deputy Chief
Executive
(Banking)
Banking returns

Banking Policy Department
Team A
Basel III liquidity regime
Basel III market risk framework
Basel III internal ratings based approach
Stress testing
Team B
Basel III standardized approach
Basel III regulatory capital
Basel III operational risk framework
Supervisory review process
Banking (Disclosure) Rules
Team C
International co-operation
Policy research

Banking Supervision Department
Case teams
Systematical important banks and retail banking
group
Greater China AIs
Foreign AIs
Specialist teams
Corporate credit
Treasury, Internet banking and operational risk
Anit-money laundering and financial crimes

Banking Conduct Department
Licensing of Authorized Institutions (“AIs”)
Consumer protection
Selling of investment products
Personal privacy protection
Co-operations among domestic regulators and
government agencies

Enforcement
Complaint handing
Preliminary investigation
Case referral to the SFC
Minor disciplinary actions

Outline
Why financial regulation
Banking Ordinance
Banking policy
Banking supervision

Policy framework
Subsidiary legislations to Banking Ordinance
Other related ordinances
Supervisory policy manuals
Circulars
International co-operations

Major subsidiary legislations
to Banking Ordinance
CAP 155L
Banking (Capital) Rules
CAP 155M
Banking (Disclosure) Rules
CAP 155Q
Banking (Liquidity) Rules

Other related ordinances
CAP 615
Anti-Money Laundering and Counter-Terrorist
Financing (Financial Institutions) Ordinance
CAP 486
Personal Data (Privacy) Ordinance
CAP 581
Deposit Protection Scheme Ordinance

Supervisory policy manual
Statutory guideline
Same status as a subsidiary legislation
Non-statutory guideline
Supervisory expectations
No legal power
http://www.hkma.gov.hk/eng/key-functions/banking-
stability/supervisory-policy-manual.shtml

Circulars
Response to a contemporary regulatory subject
Developed in a shorter period of time (e.g. 1 month)
Notice
Reminder and summary
Supervisory expectations
Common issues
Sound practices
http://www.hkma.gov.hk/eng/key-information/guidelines-and-
circulars/circulars/2015

International co-operations
Be a member of the Basel Committee on
Banking Supervision
Review and feedback on the consultative
documents from the BCBS
Attending international conferences on
banking supervision
Organizing international conferences on
banking supervision

Outline
Why financial regulation
Banking Ordinance
Banking policy
Banking supervision

Supervisory AI group
Systematically important banks
HSBC(HK), Hang Seng
Standard Charter (HK), BoC(HK), BEA
Retail banking group
Large and complex AIs
Other Greater China AIs
Other foreign AIs

Supervision framework
Supervisory profiling
Banking return
Prudential survey
Offsite review
Onsite examination
Annual tripartite meeting
Control self-assessment

Supervisory profiling
A long questionnaire comprising 30 to 40 questions
Subject officer
Composition of subject committee
IT systems in place for the subject
Major MIS reports
No. of customers
Risk classification system
No. of incidents reported during the last three years
Latest audit findings
To capture static information about a AI’s compliance program on a
particular regulatory subject
To be completed within two to three months, renew on annual basis
Regulators to build a centralized database

Banking return (1)
MA(BS)1, 1A and 1B - Assets and Liabilities
MA(BS)1C - Profit and Loss Account
MA(BS)1D - Large Exposures
MA(BS)1E - Liquidity Position
MA(BS)1F (a) and (b) - Certificate of Compliance
MA(BS)1G - Maturity Profile
MA(BS)2 - External Liabilities and Claims
MA(BS)2A - Loans and Advances and Provisions
MA(BS)3 - Capital Adequacy Ratio
MA(BS)6 - Foreign Currency Position
MA(BS)9 - Cross-Border Claims
MA(BS)10 - Weekly Statement of Certain Assets and Liabilities

Banking return (2)
MA(BS)11 - Hong Kong Dollars Interbank Transactions
MA(BS)12 - Interest Rate Risk Exposures
MA(BS)12(i) - Interest Rate Risk Exposures (Supplementary Information)
MA(BS)13 - Mandatory Provident Fund Related Activities
MA(BS)14 - Securities Related Activities
MA(BS)15 - Insurance Related Activities
MA(BS)16 - Return of Renminbi (RMB) Business Activities
MA(BS)18 - Return on Selected Data for Liquidity Stress-testing
MA(BS)20 - Return of Mainland Activities
MA(BS)21 - Return of International Banking Statistics
MA(BS)24 - Return of Information for Assessment of Systemically
Important Authorized Institutions

Prudential survey
A short questionnaire to collect some ad-hoc
information during the year
No. of transactions with Mr. 薄熙來, Ms. 谷開來 and Mr.
薄瓜瓜 during the last three years
No. of large amount out-going fund transfers from
Chongqing city during the last three years
No. of customers in North Korea
Driven by contemporary political, economic,
regulatory and/or media focus
Issued on ad-hoc basis
To be completed within one to four weeks

Off-site review
AI’s revised and updated policies and
procedures
Independent audit reports on an AI’s
compliance program
Action plans to mitigate audit findings
Progress report on mitigation actions
Major incident reports
Follow up by prudential meetings

Onsite examination
Comprehensive examination
Covering major areas of a regulatory subject
To assess the quality of an AI’s compliance program
Two/three examiners, around two to three months
Thematic examination
Covering one to three hot areas of a regulatory subject
Aim at identifying sound practices and common issues of
a contemporary topic
One man band, around one month

Annual tripartite meeting
Three-party meeting among
AI’s top management
External auditor
HKMA
To discuss the critical issues observed during
annual audit for improvement

Control-self assessment
A comprehensive audit check list
To be completed by an AI himself
Covering a critical regulatory subject
For each control procedure
Compliance status – fully, partially or not
compliant
Explanations of compliance
Mitigation plan and tentative completion date

The regulatory framework of banking industry in hong kong

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