HKMA Relaxes Foreign Bank Entry Barrier

by Mary Swire, Tax-News.com, Hong Kong

13 May 2002

Hong Kong's Executive Council announced yesterday that it has endorsed the proposals put forward by the Hong Kong Monetary Authority (HKMA) to relax market entry criteria for the banking sector. The main change is to reduce the minimum asset requirement for foreign banks from US$16bn to HK$4bn (the same as for local banks) and it follows complaints from Hong Kong banks that they have a limited chance of entering the mainland market because of the high asset requirement of US$20bn.

The HKMA hopes that its unilateral relaxation of entry criteria will encourage China to lower its own entry barrier. The Authority reviewed its existing 3-tier authorisation structure in December 2001, and said that in view of the ongoing consolidation in the sector and the fact that the banking supervisory system has been further strengthened, it believed that some of the market entry criteria can be relaxed without compromising banking stability. The main proposals arising from the review are:

• replacing the US$16 billion asset size criterion for overseas-incorporated bank applicants by the much lower balance sheet size criteria applicable to locally incorporated bank applicants, which are currently HK$3 billion for customer deposits and HK$4 billion for total assets;
• reducing the period of operation as a restricted licence bank (RLB) or deposit-taking company (DTC) from ten to three years and dispensing with the "association with Hong Kong" requirement for locally incorporated RLBs and DTCs to upgrade to licensed bank status;
• increasing the minimum capital requirement for locally incorporated bank applicants from HK$150 million to HK$300 million and extending this requirement to overseas-incorporated bank applicants (in respect of the bank as a whole). This adjustment aims at striking a balance between making it easier for institutions to enter the market as full licensed banks and avoiding a multiplicity of small banks;
• allowing overseas incorporated banks to subsidiarise their Hong Kong operations provided that they have been authorized to conduct banking business in Hong Kong for not less than three years and the amounts of customer deposits and assets that will be transferred to the subsidiary seeking authorization are not less than HK$3 billion and HK$4 billion respectively; and
• maintaining the current three-tier authorization system until the proposed changes to the market entry criteria have bedded down and worked their way through the system.

"The proposed relaxation of the market entry criteria would help to attract a broader range of domestic and international institutions to participate in our banking sector. This would be conducive to maintaining Hong Kong's status as an international financial centre," said Mr David Carse, Deputy Chief Executive of the HKMA.

The change is also aimed at attracting more foreign lenders to Hong Kong, as the number of banks has declined 37% from 380 to 239 in the past six years; the HKMA says the fall was partly caused by withdrawal of foreign lenders, in particular Japanese and European banks, after the Asian financial crisis.

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