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HKMA consultation begins on review of Three-Tier Banking System

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Authored by: Simon Deane and Sally Lau

On 26 June 2023, the Hong Kong Monetary Authority (“HKMA”) issued a consultation paper for a review of Hong Kong’s three-tier banking system.

The current banking system in Hong Kong has three-tiers, comprising of licensed banks (“LBs”), restricted licence banks (“RLBs”) and deposit-taking companies (“DTCs”). This structure has been in place now for four decades and aimed to strike a balance between making entry into the banking system as flexible as possible and protection of small depositors.

Starting from the premise that the three-tier system has become more complex than necessary to achieve the aforesaid balance and that the market share of DTCs has dwindled over time, the HKMA proposes to simplify the three-tier structure into two tiers by merging DTCs into the RLB sector and to replace the three-tier structure with a two-tier banking system.

Further, the HKMA proposes to:-

(a) discontinue the authorization of new DTCs, and invite and encourage existing DTCs to upgrade themselves into the second-tier (i.e. RLBs) or LBs, within a transition period of 5 years; and

(b) keep the requirements for the second-tier institutions unchanged, including the minimum capital requirement (i.e. HK$100 million) and the minimum deposit size requirement (i.e. HK$500,000), subject to suitable transitional arrangements for existing depositors of DTCs.

The HKMA is of the view that the proposed replacement of the three-tier structure will not have a significant impact on banking stability nor on market dynamics.

The consultation will last until 25 September 2023. Interested parties are welcome to submit their views to the HKMA on or before the deadline.

For the press release, please see here. To access a full copy of the consultation paper, please see here.

Key Contacts

Simon Deane

Consultant | Banking and Finance

Email or call +852 2825 9209

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