Information Note for the Legislative Council
Panel on Financial Affairs
Proposed Amendments to the Banking Ordinance
This paper outlines the proposed amendments to the Banking Ordinance (the Ordinance) in the Banking (Amendment) Bill 1999. The main purposes of the amendments are to bring Hong Kong's banking supervisory regime in line with the Basle Committee's Core Principles for Effective Banking Supervision and to improve the operation of the Ordinance in light of market developments.
2. In September 1997, the Basle Committee on Banking Supervision published the Core Principles which were endorsed by the central banks of the G10 countries. The Core Principles serve as a basic reference for supervisory authorities around the world to review their existing supervisory arrangements and to initiate a programme designed to address any deficiencies as quickly as practicable within their legal authority.
3. Hong Kong's banking supervision framework substantially complies with the Core Principles (please see the enclosed booklet on an assessment of the position in Hong Kong) except in the following areas:
- there are no formal requirements for authorized institutions (AI) to notify or seek the approval of the Hong Kong Monetary Authority (MA) before making major acquisitions or investments, except in the case of the acquisition or establishment of overseas banking subsidiaries;
- the MA is not legally permitted to disclose information of individual customers of AIs to an overseas supervisory authority;
- the MA's supervisory power to bring about timely corrective actions on a problem AI may be disrupted by a winding-up petition against the AI presented by creditors; and
- there are a few cases of existing AIs in Hong Kong which are part of parallel banking structure (a holding company holding subsidiary banks in different jurisdictions) over which there is no consolidated supervision.
4.It is our policy that the supervisory framework in Hong Kong should conform as much as possible to international supervisory standards. The deficiencies mentioned in paragraph 3(a), (b) and (c) above can be addressed by making appropriate amendments to the Ordinance. The issue of parallel banking structure in (d) above is more complicated and requires the co-operation of the respective overseas banking supervisors. This is better addressed through ring-fencing the institutions concerned in Hong Kong and appropriate discussions with the relevant supervisors.
Major acquisitions or investments by AIs
5. Core Principle 5 provides that banking supervisors must have the authority to establish criteria for reviewing major acquisitions or investments made by an AI and ensuring that corporate affiliations or structures do not expose the AI to undue risks or hinder effective supervision. In these instances, the banking supervisor will determine if the institution has both the financial and managerial resources to make the acquisition. The supervisor must clearly define what types and amounts of investments need prior approval and notification.
6. In determining what constitutes a major acquisition or investment in a company by an AI, the main supervisory concern is how the proposed acquisition or investment would affect the financial position of the institution, such as its capital base or profitability. According to general accounting convention, a 5% effect on profits, capital or asset would normally be considered material.
7. In view of the above and the fact that Section 87 of the Ordinance already limits an AI's acquisition or holding of shares in any other company in aggregate to 25% of its capital base, we propose to require a locally incorporated AI to seek the MA's prior approval of any major acquisition or investment in a company (including establishment of a company) which is 5% or more of the capital base of the AI except in certain specific cases .
Disclosure of information about individual customers
8. Core Principle 25 provides that host banking supervisors of the local operations of foreign banks must have power to share information needed by the home country supervisors of those banks for the purposes of carrying out consolidated supervision. In the view of the Basle Committee, this would include information about individual customers.
9. In Hong Kong, section 121(3) of the Ordinance prohibits the sharing of information about individual customers of a bank with an overseas supervisory authority. To comply with the Core Principle 25, it is proposed that the restriction be removed.
10. To address the concern about lack of control on the onward disclosure of information by the receiving authority, it is proposed that new provisions be added to the Ordinance to enable the MA to attach a condition to any disclosure made under section 121 and to require the MA's consent for any onward transmission of such information. Such a condition will be mandatory in the case of proposed disclosure of individual customers' information.
Provisions relating to winding-up petitions of AIs
11. Core Principle 22 provides that banking supervisors must have at their disposal adequate supervisory measures to bring about timely corrective actions when banks fail to meet prudential requirements, when there are regulatory violations, or where depositors are threatened in any other way.
12. At present, the MA possesses a range of powers to accomplish the goals set out in Core Principle 22. For example, under section 52(1)(C), the MA may appoint a Manager to take control of the affairs, business and property of an AI when, for example, the MA is of the opinion that the AI is carrying on its business in a manner detrimental to the interests of its depositors or creditors. The appointment of the Manager seeks to enable a troubled institution to be nursed back to health, or alternatively to enable the MA to take quick action to safeguard the assets of the AI until a liquidator can be found. These measures are ultimately aimed to protect the interests of depositors and maintain the stability of the banking sector.
13. However, the Ordinance does not prevent any unsatisfied creditor from petitioning to wind-up an AI or from taking legal proceedings against the assets of the AI during the period of the Manager's appointment. Moreover, there is no procedural safeguards to ensure that the regulator's views are heard when a winding-up petition of an AI is presented by a person other than the Financial Secretary. This is not a satisfactory situation as the Manager's efforts to effectively discharge his responsibilities might be disrupted.
14. We therefore propose that a provision be introduced in section 122 of the Ordinance to give the MA the right to be heard in respect of a winding-up petition against an AI and to support or oppose such a petition. Such a petition will enable the court to take the regulator's view into account before it decides on whether to wind up a regulated institution. A similar provision can be found in the Insurance Companies Ordinance.
15. The other proposed amendments seek to improve the operations of the Banking Ordinance in the following areas:
- remove the onerous requirement on every AI incorporated in Hong Kong to publish in newspapers its audited annual accounts and the auditors' report, and to replace it with a discretionary power for the MA to require all AIs to publish or disclose information relating to their financial affairs in a more flexible manner;
- allow foreign AIs to lodge with the MA either a copy of their audited annual accounts or, with the MA's prior approval, a copy of the consolidated accounts of their holding company;
- enable the MA to recognize a wider range of banking supervisory authorities outside Hong Kong,
- simplify the procedures for seeking the MA's consent to become an employee of an AI; and
- enable the MA to impose conditions on existing controllers of AIs should the need arise.
16. Amendments have also been proposed to bring other provisions of the Ordinance up to date with changing market developments and introduction of new banking products.
17. It is expected that the proposed amendments to the Banking Ordinance outlined above will be introduced into the Legislative Council in May 1999.
Financial Services Bureau