Banking Regulations Chapter Summary

Chapter 2
Banking Regulations
The Presentation Slides for Teaching
Financial Regulations and Compliance Practices
Website : https://sites.google.com/site/quanrisk
E-mail : quanrisk@gmail.com
Copyright © 2021 CapitaLogic Limited

Declaration
 Copyright © 2021 CapitaLogic Limited.
 All rights reserved. No part of this presentation file may be
reproduced, in any form or by any means, without written
permission from CapitaLogic Limited.
 Authored by Dr. LAM Yat-fai (林日辉),
Chief Data Scientist, CapitaLogic Limited,
Adjunct Professor of Finance, City University of Hong Kong,
Doctor of Business Administration,
CFA, CAIA, CAMS, CFE, FRM, PRM, MCSE, MCNE.
Copyright © 2021 CapitaLogic Limited 2

A model financial
regulatory framework
Ordinance
Regulator
Licensing Policy Supervision
Advisory
committees
Enforcement
Industry
associations

Outline
 Banking Ordinance
 Hong Kong Monetary Authority
 Licensing
 Policy
 Supervision
 Enforcement

CAP 155 Banking Ordinance
 To regulate banking business and deposit
taking business
 To make provision for the supervision of banks
so as to provide a measure of protection to
depositors
 To promote the general stability and
effectiveness of the banking system
 To provide for matters incidental thereto or
connected therewith

Parts of Banking Ordinance (1)
Part Topic
1 Preliminary
2
Appointments, functions of Monetary Authority, reports
by Monetary Authority and power of Chief Executive to
give directions
3
Banking business and business of taking deposits to be
carried on by Authorized Institutions only
4 Authorization
5 Revocation of authorization

Part Topic
6 Suspension of authorization
7 Transfer of authorization
8
Local branches, local offices, local representative offices
and fees
9
Overseas branches, overseas representative offices, fees and
overseas banking corporations
10 Powers of control over Authorized Institutions
11 Audits and meetings

Part Topic
12 Disclosure of information by Authorized Institutions
13 Ownership and management of Authorized Institutions
15
Limitations on loans by and interests of Authorized
Institutions
16 Advertisements, representations and use of title "Bank"
16A Capital requirements
16B Liquidity requirements

Part Topic
16C
Codes of practice for rules made under Section 60A(1),
97C(1) Or 97H(1)
17A Banking review tribunal
20 Investigations of Authorized Institutions
20A Money brokers
21 Miscellaneous
22 Transitional, savings and repeal

Major functions of
the Banking Ordinance
 Banking businesses
 Bank regulator
 Bank licensing
 Regulatory duties

Banking business
 Cheques
 Process cheques paid in or drawn by customers
 Short term deposits
 Receive from the general public money on savings,
current or other similar account repayable on
demand or with contractual maturity up to 3
months

Deposit taking business
 No explicit definition in the Banking
Ordinance
 To be determined based on general practices
 The term “business” may refer to an activity
with a systematic and repetitive nature
 If a person took 5 separate deposits within 30
days, that person shall be deemed to have been
carrying on a deposit taking business, unless
there is evidence to demonstrate the contrary

CAP 163 Money Lenders Ordinance
 To provide for the control and regulation of money lenders
and money lending transactions, the appointment of a
Registrar of Money Lenders and the licensing of persons
carrying on business as money lenders
 To provide protection and relief against excessive interest
rates and extortionate stipulations in respect of loans
 To provide for offences and for matters connected with or
incidental to the foregoing
 Not applicable to the institutions regulated by the
HKMA

Outline
 Licensing
 Policy
 Supervision
 Enforcement

Major functions of the HKMA
 Promote the stability and integrity of the financial
system, including the banking system
 Maintain currency stability within the framework of
the Linked Exchange Rate System
 Manage the Exchange Fund
 Help maintain Hong Kong's status as an international
financial centre, including the maintenance and
development of Hong Kong's financial infrastructure

Banking departments,
Hong Kong Monetary Authority
Monetary
Authority
Banking
Policy
Banking
Supervision
Banking
Conduct
Enforcement
Legislations
Supervisory
policy manuals
Offsite teams
Onsite teams
Specialist teams
Licensing
Customer
protection
Selling of
investment products
Anti-money
laundering
SFO preliminary
investigation
Deputy Chief
Executive
(Banking)
International
co-operation
Complaint
handling

Banking Policy Department
 Basel III framework
 Capital adequacy
 Liquidity sufficiency
 Supervisory policy manuals
 Policy research
 Enhanced qualification framework
 A member of the Basel Committee on Banking
Supervision

Banking Supervision Department
 General supervision teams
 Systematical important banks
 Retail banks
 Virtual banks
 Wholesale banks
 Risk based specialist teams
 Credit risk
 Market risk and liquidity risk
 Operational risk and technology risk

Banking Conduct Department
 Bank licensing
 Customer protection
 Personal privacy protection
 Co-operations among domestic regulators and
governmental departments
 Selling of investment products
 Policy
 Supervision

Enforcement Department
 Anti-money laundering and counter-terrorist
financing
 Full regulatory power from the AMLO
 Investigative power delegated from the SFC
through the memorandum of understanding
 Complaint handing

Technical and political skills
Technical
 Accounting
 Legal
 Audit
 Finance
Political
 Public administration
 Media

Outline
 Licensing
 Policy
 Supervision
 Enforcement

Three-tier licensing system
 Licensed bank
 Virtual bank
 Restricted licence bank
 Deposit taking company
 Collectively referred to as
Authorized Institution (AI)

Licensed bank
 Full range of banking services
 Operate savings and current accounts
 Deposits taking of any size and any maturity
 Pay or collect cheques drawn by or paid in by
customers
 23 + 8 incorporated in Hong Kong
 120 incorporated overseas

Virtual bank
 A bank which primarily delivers retail banking
services through the Internet or other forms of
electronic channels
 Should not impose any minimum account balance
requirement or low-balance fee on their customers
 8 incorporated in Hong Kong
 At least one physical office in Hong Kong

Virtual bank
 Ant Bank
 Mox Bank
 Ping An Oneconnect
 Welab Bank
 Airstar Bank
 Fusion Bank
 Livi Vb
 ZA Bank

Restricted licence bank
 Minimum deposit amount HKD 500,000
 Primarily corporate banking and capital market
services
 12 incorporated in Hong Kong
 5 incorporated overseas
 Goldman Sachs Asia Bank Limited
 J. P. Morgan Securities (Asia Pacific) Limited
 Banc of America Securities Asia Limited

Deposit taking company
 Minimum deposit amount HKD 100,000 with
contractual maturity longer than three months
 Primarily consumer finance and commercial
lending services
 All 12 incorporated in Hong Kong
 Fubon Credit (Hong Kong) Limited
 Chong Hing Finance Limited
 Public Finance Limited

Outline
 Licensing
 Policy
 Supervision
 Enforcement

Policy framework
 Amendments to the BO
 Subsidiary legislations to
the BO
 Other related ordinances
 Supervisory policy
manuals
 Guidance notes
 Codes of conduct
 Circulars
 Domestic co-operations
 International co-operations
 Professional development
 Statistics

Amendments to Banking Ordinance

Subsidiary legislation
 Any proclamation, rule, regulation, order, resolution, notice,
rule of court, bylaw or other instrument made under or by
virtue of any ordinance and having legislative effect
 Usually made by the government to provide detailed rules and
regulations for technical or procedural details necessary for the
implementation of an ordinance
 Approved by a sub-committee formed under the House
Committee of the Legislative Council
 Approval procedures
 Positive vetting
 Negative vetting

Major subsidiary legislations
to Banking Ordinance
 CAP 155L
 Banking (Capital) Rules
 CAP 155M
 Banking (Disclosure) Rules
 CAP 155Q
 Banking (Liquidity) Rules
https://www.elegislation.gov.hk/index/chapternumber?p0=1
&TYPE=1&TYPE=2&TYPE=3&LANGUAGE=E&CAP_
NO_FR=155

Other related ordinances
 CAP 615
 Anti-Money Laundering and Counter-Terrorist
Financing Ordinance
 CAP 581
 Deposit Protection Scheme Ordinance
 CAP 486
 Personal Data (Privacy) Ordinance

Supervisory policy manual
 Statutory guideline
 Same legal status as a subsidiary legislation
 Non-statutory guideline
 Supervisory expectations
 No statutory power
http://www.hkma.gov.hk/eng/key-functions/banking-
stability/supervisory-policy-manual.shtml

Regulatory subjects
 Asset and liability management
 Credit risk management
 Anti-money laundering
 China exposures
 Internet banking
 Business continuity planning

Standard structure of a SPM
 Senior management oversight
 Policies and procedures
 IT systems and MIS reporting
 Training and awareness
 Record keeping
 Compliance and audit
 Independent assessment

Development of a SPM
 Review of similar guidelines from
 Basel Committee on Banking Supervision
 Other major bank regulators
 First draft
 Soft consultation
 Second draft
 Official consultation through the Hong Kong Association of Banks and
Deposit Taking Companies Association
 Third draft
 Official consultation through Hong Kong Association of Banks and
Deposit Taking Companies Association
.
.
.
 Final version

Guidance notes, circulars
and codes of conduct
 Response to a contemporary regulatory subject
 Developed in a shorter period of time (e.g. 1 month to 1 year)
 No statutory power
 Urgent notice
 Reminder and summary
 Supervisory expectations
 Common issues
 Sound practices
https://www.hkma.gov.hk/eng/regulatory-resources/regulatory-
guides/circulars/

Domestic co-operations
 MoU entered with the SFC, IA, and MPFA
 Frontline regulator for the selling process of banks
selling
 Investment products
 Insurance products
 MPF products
 Principal regulator of banks’ investment products
linked to
 Currency rate
 Interest rate

International co-operations
 Be a member of the Basel Committee on
Banking Supervision
 Review and feedback on the consultative
documents from the BCBS
 Attend international conferences on banking
supervision
 Organize international conferences on banking
supervision in Hong Kong

Professional development
 Through Hong Kong Institute of Bankers
 Enhanced qualification framework
 Anti-money laundering and counter-terrorist
financing
 Treasury management
 Credit risk management
 Operational risk management
 Retail wealth management
 Cyber security

Statistics

Outline
 Licensing
 Policy
 Supervision
 Enforcement

Supervision framework
 Supervisory profiling
 Banking return
 Prudential survey
 Offsite review
 Onsite examination
 Annual tripartite meeting
 Control self-assessment

Supervisory profiling
 A long questionnaire comprising 30 to 40 questions
 Subject officer
 Composition of subject committee
 IT systems in place for the subject
 Major MIS reports
 No. of customers
 Risk classification system
 No. of incidents reported during the last three years
 Latest audit findings
 To capture static information about a bank’s compliance programme on a
particular regulatory subject
 To be completed within two to three months, review on annual basis
 The HKMA to build a centralized database

Banking return (1)
 MA(BS)1, 1A and 1B Assets and Liabilities
 MA(BS)1C Profit and Loss Account
 MA(BS)1D Large Exposures
 MA(BS)1E Liquidity Position
 MA(BS)1F (a) and (b) Certificate of Compliance
 MA(BS)1G Maturity Profile
 MA(BS)2 External Liabilities and Claims
 MA(BS)2A Loans and Advances and Provisions
 MA(BS)3 Capital Adequacy Ratio
 MA(BS)6 Foreign Currency Position
 MA(BS)9 Cross-Border Claims
 MA(BS)10 Weekly Statement of Certain Assets and Liabilities

Banking return (2)
 MA(BS)11 Hong Kong Dollars Interbank Transactions
 MA(BS)12 Interest Rate Risk Exposures
 MA(BS)12(i) Interest Rate Risk Exposures (Supplementary Information)
 MA(BS)13 Mandatory Provident Fund Related Activities
 MA(BS)14 Securities Related Activities
 MA(BS)15 Insurance Related Activities
 MA(BS)16 Return of Renminbi (RMB) Business Activities
 MA(BS)18 Return on Selected Data for Liquidity Stress-testing
 MA(BS)20 Return of Mainland Activities
 MA(BS)21 Return of International Banking Statistics
 MA(BS)24 Return of Information for Assessment of
Systemically Important Authorized Institutions

Prudential survey
 A short questionnaire to collect some ad-hoc
information during the year
 No. of customers in mainland China
 Loan amounts to property developers
 Transactions connected to Mr. Patrick HO (何志平)
 Driven by contemporary political, economic,
regulatory and/or media focus
 Issued on an ad-hoc basis
 To be completed within one to four weeks

Off-site review
 Review a bank’s
 Updated policies and procedures
 Audit report on a bank’s compliance programme
 Action plans to mitigate the audit findings
 Progress report on mitigation actions
 Major incident reports
 May follow up with prudential meetings

Onsite examination
 Comprehensive examination
 Cover major areas of a regulatory subject
 To assess the quality of a bank’s compliance programme
 Two to three examiners, one to two months to complete
 Thematic examination
 Cover one to three hot areas of a regulatory subject
 To identify common issues and sound practices of a
contemporary regulatory topic
 One man band, one to two weeks to complete

Annual tripartite meeting
 Three-party meeting among
 Bank’s senior management
 External auditor
 The HKMA
 To discuss the critical issues observed during
annual audit and corresponding action plans

Control-self assessment
 A comprehensive compliance check list
 To be completed by a bank himself
 Cover a critical regulatory subject
 For each control procedure
 Compliance status
 Fully, partially or not compliant
 Explanations of compliance
 Action plan and tentative completion date

CAMELS
 Capital adequacy
 Assets
 Management capability
 Earnings
 Liquidity
 Sensitivity
CAMELS ratings
Rating
1. Strong
2. Satisfactory
3. Flawed to some degree
4. Poor
5. Unsatisfactory

Contemporary regulatory subjects
 Credit exposures in mainland China
 Anti-money laundering
 Financial technology

Out of focus regulatory subjects
 Trade finance
 Syndicated lending
 Taxi loan financing
 Outsourcing
 Internal audit function
 Business continuity planning

Outline
 Banking businesses and licensing
 Policy
 Supervision
 Enforcement

Enforcement framework
 Banking Ordinance grants very limited
investigative power to the HKMA
 Anti-money laundering and counter-terrorist
financing
 Empowered by the AMLO
 SFC empowered by the SFO
 MoU entered with the SFC

Selling of investment products
 Preliminary investigations
 Suspicious cases referred to the SFC
 Minor disciplinary actions
 Suspension of selling investment products

The Banking Advisory Committee
The Deposit Taking Companies Advisory Committee
 Two advisory committees established for the purpose of advising the Chief
Executive of Hong Kong on matters relating to the Banking Ordinance, in
particular matters relating to business activities of licensed banks, restricted
licence banks and deposit taking companies
 Financial Secretary as the chairman
 Members including the Monetary Authority and other persons appointed by
the Financial Secretary under the delegated authority of the Chief
Executive of Hong Kong
https://www.hkma.gov.hk/eng/about-us/the-hkma/advisory-committees/the-
banking-advisory-committee-and-the-deposit-taking-companies-advisory-
committee/the-banking-advisory-committee/
https://www.hkma.gov.hk/eng/about-us/the-hkma/advisory-committees/the-
banking-advisory-committee-and-the-deposit-taking-companies-advisory-
committee/the-deposit-taking-companies-advisory-committee/

Industrial associations
 The Hong Kong Association of Banks
 To promote the interests of full licensed banks in Hong Kong and to make rules
for the conduct of banking business, in consultation with the Financial
Secretary
 To be a focal point for consultation on law reform, new legislation and
regulatory matters
 To form a sounding board for the government and other relevant bodies on
general business and banking issues
 To offer a channel of communication among its members and with third parties
 To promote best practice to members and provide information service such as
issuing circulars on lost items of payment instruments
 To organize or sponsor conferences on topical issues and annual dinners with
distinguished speakers
 The Hong Kong Association of Restricted Licence Banks and Deposit
Taking Companies
 Similar to The Hong Kong Association of Banks

Reference
 HKMA, 2020. Guide to authorization.

Banking Regulations Chapter Summary

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Similar a Banking Regulations Chapter Summary

Similar a Banking Regulations Chapter Summary (20)

Más de Quan Risk

Más de Quan Risk (20)

Último

Último (20)

Banking Regulations Chapter Summary