In a move to improve the efficiency of Hong Kong’s financial system, the Hong Kong Monetary Authority (HKMA) has initiated public consultations on a proposal to significantly modify the city’s three-tier banking structure. The proposal suggests the removal of the smallest category of lenders to create a streamlined two-tier system. The consultation period began on 25 June and is scheduled to run until 25 September.
Hong Kong’s existing three-tier banking system, which includes licensed banks (LBs), restricted licence banks (RLBs), and deposit-taking companies (DTCs), has been in place for over 40 years. The system was designed to balance the ease of banking entry and the safeguarding of small depositors. However, recent HKMA analyses indicate that the complexity of the three-tier system has outpaced its necessity, prompting the proposal to consolidate the DTCs into the RLB sector.
For a seamless transition, existing DTCs are encouraged to upgrade to the newly-proposed second tier or to LBs within a five-year timeframe. Alternatively, they may opt to revoke their registration and transition into different regulated financial entities.
In terms of the proposed second tier, the current minimum capital requirement of HK$100 million and minimum deposit size of HK$500,000 for RLBs are deemed appropriate, with no amendments proposed. The second tier institutions would also be allowed to operate without a maturity limit on deposits. However, they would be restricted from operating checking accounts or savings accounts, maintaining a key distinction between LBs and the second-tier institutions.
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The HKMA also proposed allowing all second-tier institutions to apply for access to the Real Time Gross Settlement (RTGS) systems, which manage payment and securities transaction settlements. This also applies to any DTCs that upgrade to the new second tier.
Other considerations include the naming and supervision of the new second tier. HKMA believes the current name “restricted licence banks” remains suitable for the second tier, and no changes to the supervisory requirements are planned.
The proposed changes are expected to have a negligible impact on banking stability and market dynamics. A clear distinction would still exist between full LBs, free to take retail deposits without restrictions, and the second-tier institutions subject to minimum deposit size and capital requirements. The market share of DTCs is small, meaning little impact on existing customers and depositors. Transitional provisions would be in place for existing depositors to migrate to the new framework, if necessary.
Eddie Yue, Chief Executive of HKMA, remarked that this review aims to simplify the banking system in Hong Kong, revitalise DTCs, and enhance Hong Kong’s role as an international financial hub. The public is now invited to weigh in on this critical transformation until 25 September.
Source: Marketing Interactive
