Public consultation begins on HKMA's proposed changes in HK's 3-tier banking systems

The Hong Kong Monetary Authority (HKMA) has suggested major changes in the city’s three-tier banking systems in an effort to eliminate the smallest category of lender altogether. The relevant public consultation has also commenced on 25 June and will last until 25 September. 

The current three-tier structure of the banking system (comprising of licensed banks (LBs), restricted licence banks (RLBs) and deposit-taking companies (DTCs) had a history of four decades and aimed to strike a balance between flexibility of entry into the banking system and protection of small depositors.

However, based on the HKMA’s recent analyses, the three-tier system has become more complex than necessary to achieve the above-mentioned balance, and the market share of DTCs has dwindled over time. Therefore, it is recommended that the three-tier structure be simplified into two tiers by merging DTCs into the RLB sector to form a new second-tier of our banking system.

In order to facilitate a smooth transition for all existing DTCs, the existing DTCs will be invited and encouraged to upgrade to the second-tier or LBs within a transition period of five years. In case they are no longer pursuing deposit-taking business under their own strategies, they may consider revoking their registration voluntarily and transforming themselves into other types of regulated financial entities. 

For the new second-tier, the existing minimum capital requirement of HK$100 million and minimum deposit size requirement of HK$500,000 on RLBs are considered appropriate, and there is no strong justification to introduce any change to these parameters. Furthermore, no maturity limit would be imposed on the deposits to be taken by the new second-tier institutions. Meanwhile, the restriction that the second-tier institutions should not operate checking accounts or savings accounts will remain a principal distinction between LBs and the second-tier institutions.

Currently, LBs are required to join, and RLBs can apply to join, the Real Time Gross Settlement (RTGS) systems for handling payments and settlement of securities transactions through the Central Moneymarkets Unit and the Hong Kong Securities Clearing Company Limited. It is proposed that all second-tier institutions shall be allowed to apply for access to the RTGS systems, including those existing DTCs upgrading themselves to the new second-tier.

The HKMA has also considered other areas including the nomenclature and supervision of the new second-tier. It is considered that the existing nomenclature “restricted licence banks” remains appropriate and should thus be kept for the second-tier. As for supervision, the HKMA has no intention to change the existing supervisory requirements on RLBs as a result of this review exercise.

The proposed simplification of the three-tier structure is not expected to have significant impact on banking stability. There will still be a clear distinction between full LBs that can take retail deposits without any restriction, and the new second-tier that will be subject to minimum deposit size and capital requirements at the existing levels applicable to RLBs, according to the proposal. 

It is also unlikely that the proposal will have a significant impact on market dynamics or on the existing customers and depositors of the DTCs, as the market share of DTCs (in terms of total assets and customer deposits) in the banking sector is very small. Suitable transitional arrangements will be provided to enable existing depositors to migrate to the proposed new framework if necessary, said the proposal. 

Chief executive of the HKMA Eddie Yue, said, “The review aims to simplify the structure of Hong Kong’s banking system, enhancing its vital role in strengthening Hong Kong’s status as an international financial centre, and to revitalise institutions in the category of deposit-taking companies and enhance their flexibility and efficiency in conducting business and meeting customers’ needs.” 

HKMA is now consulting the public on simplifying the banking system until 25 September.

Related articles:
ZA Bank requires additional authentication from users to comply with HKMA's guidelines
HKMA sets new guidelines for banks amid credit card fraud surge
HKMA reportedly urges probe into Standard Chartered card fraud