Financial Institutions

Hong Kong maintains a three-tier system of deposit-taking institutions -
licensed banks, restricted licence banks and deposit-taking companies -
which are collectively called authorised institutions under the Banking
Ordinance. The Hong Kong Monetary Authority (HKMA) is the licensing
authority for all three types of authorised institutions.

The authorisation criteria for locally-incorporated applicants and overseas
applicants for a banking licence are broadly the same. However, a local
applicant incorporated in Hong Kong must, in the opinion of the HKMA,
be closely associated and identified with Hong Kong. A local applicant
must also have a paid-up capital of at least $150 million and a minimum
trading period of 10 years as an authorised institution. The minimum
requirements for assets (net of contra items) and public deposits are $4
billion and $3 billion, respectively. For banks incorporated outside Hong
Kong applying to establish a branch in Hong Kong, the minimum
requirement for total assets is US$16 billion. A licence may still be granted
even if the asset test is not met, provided that the HKMA believes that this
would help to promote the interests of Hong Kong as an international
financial centre.

Hong Kong imposes no major barriers on overseas banks operating
domestically in Hong Kong, whether in Hong Kong dollars or other
currencies. However, overseas banks licensed since 1978 are effectively
restricted to one branch, a measure designed to avoid overcrowding in
retail banking. This restriction was relaxed in September 1994, and
foreign banks may open one regional office and a back office, in separate
buildings, to conduct such activities as strategic planning, general liaison
with correspondent banks and corporate entities, and processing and
settlement of transactions already entered into by the branch office. This
was done to help foreign banks reduce their operating costs by letting
them move some operations to areas with lower rentals. The relaxation
also applies to foreign restricted licence banks.

Hong Kong had 180 licensed banks at the end of December 1997, of
which 31 were locally incorporated. They maintained a total of 1 691
offices in Hong Kong and there were 159 representative offices of foreign
banks. The total deposit liabilities of all the licensed banks to customers at
the end of December 1997 were $2,599 billion.

Only licensed banks may operate current or savings accounts. They may
also accept deposits of any size and any maturity from the public. All
licensed banks must belong to the Hong Kong Association of Banks
(HKAB). The HKAB's Interest Rate Rules set maximum rates payable on
Hong Kong dollar savings deposits and time deposits with original
maturities of less than seven days, with the exception of deposits of
$500,000 or above, for which banks may compete freely.

Applicants for restricted bank licences must have a minimum issued and
paid-up capital of $100 million. Restricted licence banks may take call,
notice and time deposits of any maturity from the public, but in amounts
of not less than $500,000. There are no restrictions on the interest rates
they may offer. There were 66 restricted licence banks at the end of
December 1997 with total deposit liabilities to customers of $51.9 billion.

Restricted licence banks may use the word 'bank' in describing their
business in promotional literature and advertisements, but this must be
qualified by a description such as 'restricted licence', 'merchant',
'investment' or 'wholesale'. To avoid confusion with licensed banks,
descriptions such as 'retail' or 'commercial' are not allowed. Overseas
banks seeking authorisation as restricted licence banks may operate in
branch or subsidiary form. If in branch form, they may use their
registered name even if it includes the word 'bank' or a derivative, but in
this case it must be qualified prominently by the words 'restricted licence
bank' in immediate conjunction.

Besides the criteria which apply to other authorised institutions,
registration of deposit-taking companies will generally be granted only to
companies that are 50 per cent or more owned by a bank (or
exceptionally, by another fully supervised financial institution).
Deposit-taking companies are required to have a minimum paid-up capital
of $25 million. They are restricted to taking deposits of not less than
$100,000, with a term of maturity of at least three months. At the end of
December, there were 115 deposit-taking companies, with total deposit
liabilities to customers of $14.5 billion.

Only members of the SEHK and the Hong Kong Futures Exchange Ltd
(HKFE) may trade on the stock and futures exchanges respectively. At
year's end, the SEHK had 555 corporate and individual members while the
HKFE had 137 members.

Securities transactions on the stock exchange are executed by the
Automatic Order Matching and Execution System. SEHK members began
trading via a second terminal located in their own offices in January 1996.
The system has not only supplemented those terminals already available
on the trading floor, but also greatly enhanced order entry and trade
confirmation efficiency and further expanded the availability of audit trails.
In 1997, almost 63.2 per cent of transactions on SEHK were done by the
second terminal.

The SEHK launched two new products for trading in 1997 - regional
derivative warrants and convertible bonds - to further enhance Hong
Kong's status as the regional capital raising centre. The government has
exempted the transactions on these products from stamp duty with a view
to facilitating their development in Hong Kong. By end-1997, 21 regional
derivative warrants were listed on the SEHK.

The HKFE linked up with the Philadelphia Stock Exchange in April 1997
to allow the latter's currency options contracts to be traded in Hong Kong
during Asian business hours and with the New York Mercantile Exchange
in June on the trading of futures contracts of petroleum and other
commodities locally. The trading of Hong Kong Inter-bank Offer Rate
futures contracts was also changed from the outcry system to the
Automated Trading System in September.

The Hong Kong Securities Clearing Company (HKSCC) operates the
Central Clearing and Settlement System (CCASS), which is one of the
most important reforms to the risk-management system introduced after
the 1987 market crash. It is an automated book-entry system that handles
the settlement of securities. To further enhance its services, the HKSCC
was working on the implementation details to gradually extend CCASS to
retail level investors in the second quarter of 1998.

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