HK Overview

HK$ Debt Market Bonds vs. Banks Source: HKMA

Total Assets End 2006

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

HK$ Paper HK$ Bank Loans

Mill

ion

HK

$

Hong Kong Banking Industry

• Three Tier Structure

Fully Licensed Banks-23 Locally Incorporated

-108 Foreign Incorporated

Restricted License Banks- 33 RLB’s

Deposit Taking Corporations- 33 DTC’s

Hong Kong Banking IndustryThree Tier Structure

1. Fully Licensed Banks • Accept deposits of any size or maturity• 23 incorporated in HK; 114 inc. overseas.

2. Restricted License Banks• “principally engaged in merchant banking and

capital market activities”• “may take deposits of any maturity of

HK$500,000 .. and above.”• 17 incorporated in HK; 13 inc. overseas.

See: http://www.info.gov.hk/hkma/eng/bank/index.htm

BANK OF CHINA (HONG KONG) LIMITED

BANK OF EAST ASIA, LIMITED (THE)

CHINA CONSTRUCTION BANK (ASIA) CORPORATION LIMITED

CHIYU BANKING CORPORATION LIMITED

CHONG HING BANK LIMITED

CITIBANK (HONG KONG) LIMITED

CITIC KA WAH BANK LIMITED

DAH SING BANK LIMITED

DBS BANK (HONG KONG) LIMITED

FUBON BANK (HONG KONG) LIMITED

HANG SENG BANK, LIMITED

HONGKONG & SHANGHAI BANKING CORPORATION LIMITED (THE)

INDUSTRIAL AND COMMERCIAL BANK OF CHINA (ASIA) LIMITED

MEVAS BANK LIMITED

NANYANG COMMERCIAL BANK, LIMITED

PUBLIC BANK (HONG KONG) LIMITED

SHANGHAI COMMERCIAL BANK LIMITED

STANDARD BANK ASIA LIMITED

STANDARD CHARTERED BANK (HONG KONG) LIMITED

TAI SANG BANK LIMITED

TAI YAU BANK, LIMITED

WING HANG BANK, LIMITED

WING LUNG BANK LIMITED

Hong Kong Banking IndustryThree Tier Structure cont.

3. Deposit Taking Companies• “mostly owned by, or otherwise associated

with, banks.”• “engage in a range of specialised activities,

including consumer finance and securities business. “

• “may take deposits of HK$100,000 … or above with an original term of maturity of at least three months.”

• 33 incorporated in HK; 0 foreign incorporated

Licensed Banks dominant!Source: HKMA

Total Assets

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

Licensed Banks RLB DTC

Mill

ion

HK

$

Most Assets Locally Incorporated

Share of Assets

Locally Incorporated

License Banks64%

Foreign Incorporated

Licensed Banks35%

RLB's & DTC's1%

Multiple Currency Deposits

• Hong Kong banks accept large amounts of foreign currency deposits.

• Small market for Foreign currency loans in Hong Kong.

• HK banks lend money to banks overseas, multinational banks lend money to firms overseas.

Table 3.9.2 : Balance sheet1 Licensed banks (HK$ million)As at end of 11/1/2006 HK$ F.C. Total

Liabilities

Amount due to authorized institutions in Hong Kong 408,920 210,782 619,702 Amount due to banks abroad 188,604 1,534,617 1,723,221 Deposits from customers 2,717,258 2,147,977 4,865,235 Negotiable certificates of deposit outstanding 131,012 108,290 239,302 Other debt instruments outstanding 6,356 65,498 71,854 Capital, reserves and other liabilities 685,812 319,899 1,005,711

Total liabilities 4,137,961 4,387,062 8,525,024

Assets

Notes and coins 10,546 3,131 13,677 Amount due from authorized institutions in Hong Kong 423,700 198,240 621,940 Amount due from banks abroad 352,260 2,580,466 2,932,727 Loans and advances to customers 2,056,257 554,415 2,610,672 Negotiable certificates of deposit held : 60,506 40,572 101,078 Negotiable debt instruments held, other than NCDs: 536,604 1,018,483 1,555,086 Investments in shareholdings 38,507 21,499 60,007 Interests in land and buildings 61,193 344 61,537 Other assets 251,718 316,582 568,300

Total assets 3,791,291 4,733,733 8,525,024

Historical Origins

In the 1950’s• Modern Local Banks• Foreign Banks• Chinese State Banks• Native BanksIn 1960s, a moratorium on new entrants was

instituted until 1978. From 1978-2001, new foreign banks were restricted in attracting business.

Historical Origins

Origins of current licensed banks can be divided into 4 categories

1. Modern Local Banks: Colonial banks and Chinese banks dating from pre-war period. (HSBC, Bof EA,).

2. International Banks – Since the 1970’s, foreign banks have been restricted from entering HK market and are limited to a maximum of 3 branches. Some multinational banks chartered in Hong Kong before that time continue to operate. (Citibank, StanChart, Bank of America)

Origins, Cont.

3. Chinese State Banks – Chinese government set up banks in HK in pre-war era. After the revolution, these were taken over by PRC. Due to the isolation of PRC, these banks were the main link between the mainland and the world financial system (Bank of China, Nanyang Commercial)

4. Native Banks – Banks that serviced the rapidly growing retail markets for small deposits and loans during the immediate post-war migration of immigrants from the mainland (Hang Seng, Wing Lung, Dao Heng and many others)

Regulatory Framework

• Before 1948, banking industry was laissez faire. Only issuance of currency was regulated.

• Banking Ordinance of 1948 put minimal regulation in place (largely forced on colonial government by KMT worries about HK banks being used for illegal purposes).

• Since that time, HK banking history has been one of crisis and response.

Banking Ordinance of 1964• In early 1960’s, many bank runs at native banks

that were engaged in margin lending related lending activities forced government bailouts after stock market collapsed.

1. Appointment of Commissioner of Banking2. Banks were required to keep liquid or liquifiable

assets (i.e. government securities) equal to at least 25% of their liquid liabilities (i.e. bank deposits).

3. Banking investments were curtailed. Ability of banks to invest in land or equity of other businesses was limited to small share of banks capital.

Banking Ordinance of 1964• In early 1960’s, many bank runs at native banks

that were engaged in margin lending related lending activities forced government bailouts after stock market collapsed.

1. Appointment of Commissioner of Banking2. Banks were required to keep liquid or liquifiable

assets (i.e. government securities) equal to at least 25% of their liquid liabilities (i.e. bank deposits).

3. Banking investments were curtailed. Ability of banks to invest in land or equity of other businesses was limited to small share of banks capital.

Interest Rate Cartel

1. Exchange Bankers Association agreed in 1964 upon a set of rules for setting deposit interest rate caps.

2. Hong Kong Association of banks formed in 1980 as a statuatory body to set interest rate maximum.

3. In July 2001, cartel completely phased out.

•During the early 1960s, there was substantial competition for loans leading to high deposit interest rates. Some blamed these interest rates for risky lending by banks which led to crisis.

Banking Crisis of 1965

• To further eliminate “competitive” behavior, banking ordinance is changed to require explicit license from Commissioner of Banking.

• Commissioner imposes moratorium on new banking licenses until 1978 and re-imposes moratorium until 2001.

• Foreign banks are limited by “one building rule” which limits them to a single branch until 1999, switched to three buildings relaxed in 2001.

•Crash in real estate market led to bank runs at Ming Tak, Canton Trust, and Hang Seng. HSBC takes majority stake in 2nd largest deposit bank in HK, Hang Seng.

DTC Ordinance of 1981

• In 1970’s, inflation and interest rates start to raising interest rate spreads for banks. Banks and other companies open DTC’s to compete for funds especially to lend to real estate sector.

• Law passed to create 3 tier structure and limit access of DTC’s to funds. Goes into effect in 1983. Too late

• In 1982, the real estate market crashes leading many DTC’s to collapse. HSBC pledged to support well managed DTC’s ending a spreading crisis.

Declining Role of Non Full Licensed Banks

% Lending by RLBs and DTCs

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Dec

-80

Dec

-82

Dec

-84

Dec

-86

Dec

-88

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Banking Reform of 1986

1. Commissioner of Banking given ad hoc powers to regulate bank lending.

2. Banks are required to keep capital equal to 8% of risk weighted assets.

•In 1985, a large number of banks take losses on risky lending. Several banks must be bailed out by government/HSBC

High ConcentrationTop firms control a huge fraction of banking assets, 2005

Total Assets Billions of HK$

HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED (THE) 2672BANK OF CHINA (HONG KONG) LIMITED 822HANG SENG BANK LTD. 581STANDARD CHARTERED BANK (HONG KONG) LIMITED 337BANK OF EAST ASIA, LIMITED (THE) 239DBS BANK (HONG KONG) LIMITED 186INDUSTRIAL AND COMMERCIAL BANK OF CHINA (ASIA) LIMITED 115WING HANG BANK LTD. 104CITIBANK (HONG KONG) LIMITED 95NANYANG COMMERCIAL BANK, LIMITED 95

Consolidation: Recent years have seen the merger of smaller banks.

# of Loc ally Inc orporated B ank s

20

22

24

26

28

30

32

34

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Challenge for HK Banks

• Hong Kong economy has shifted toward entrepot trade.

• HK businesses are integrating with mainland.

• HK Banks cannot integrate fully due to Chinese regulations.– End of 2006, Foreign Banks can incorporate

in China and 12 HK institutions have.

More reliance on property, less on commercial loans.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Man

ufactu

ring

Trans

port

Proper

ty

Trade

Finance

Mor

tgage

s

Other

Jun, 1967 Jun, 1977 Jun, 1987 Jun, 1997 Jun, 2007

Lending by Sector

Jun, 1967 Jun, 1977 Jun, 1987 Jun, 1997 Jun, 2007Manufacturing 21.12% 13.03% 8.63% 6.01% 5.02%Transport 3.82% 7.82% 5.87% 4.71% 5.71%Property 16.19% 8.27% 11.55% 21.43% 23.18%Trade 32.14% 34.10% 11.48% 10.45% 4.95%Finance 3.50% 9.88% 10.00% 13.43% 15.03%Mortgages 8.11% 12.11% 19.03% 25.48% 26.53%Other 15.11% 14.79% 33.44% 18.49% 19.56%

Rebound of Lending to China

Loans for Use outside HK

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Dec

-80

Dec

-82

Dec

-84

Dec

-86

Dec

-88

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Reading List

• KPMG Banking Survey Report 2007• Schenk, C. Banking Crises and the Evolution of

the Regulatory Framework in Hong Kong 1945-70’, Australian Economic History Review, 43(2), July 2003. Article

• Schenk, C., Hong Kong as an International Financial Centre: emergence and development 1945-65, Routledge, 2001

• HKMA – GUIDE TO HONG KONG MONETARY AND BANKIN

G TERMS. 3RD EDITION 

– Annual Report: Banking Stability