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515.5995

Guidelines & Circulars

Our Ref: G4/26/6C

15 July 2005

To:

The Chief Executive
All authorized institutions

The Chief Representative
All local representative offices

The Chief Executive
All money brokers

Dear Sir / Madam,

Banking (Amendment) Ordinance 2005

I am writing to inform you that the Banking (Amendment) Ordinance (BAO) 2005 has been enacted on 6 July 2005 and published in the Gazette on 15 July 2005, a copy of which is attached at Annex.

The main purpose of the BAO 2005 is to amend the Banking Ordinance (BO) to put in place a legislative framework for the implementation in Hong Kong of the Basel Committee on Banking Supervision's revised capital adequacy standards (Basel II). The BAO 2005 also introduces some non-Basel II related amendments to enhance the operation of individual provisions of the BO in the light of experience. The main provisions of the BAO 2005 include those which aim at:

Implementation of Basel II

  1. providing that locally incorporated authorized institutions' (AIs') capital adequacy ratio (CAR) shall be calculated, and information on financial affairs including CAR shall be disclosed, in a manner to be prescribed in rules (i.e. Capital Rules and Disclosure Rules) to be made by the Monetary Authority (MA) under the BO. Such Rules will have the status of subsidiary legislation and hence will be subject to negative vetting by the Legislative Council. Before issuing the Rules, the MA shall be obliged to consult the statutory banking committees, the industry associations and the Financial Secretary. The amendments in relation to the calculation of CAR and disclosure of financial information are contained in sections 98A and 60A;

  2. allowing the MA to issue guidelines under section 7(3) of the BO indicating the manner in which he proposes to exercise functions conferred or imposed by or under the BAO 2005 upon him;

  3. providing that an AI that is aggrieved by a decision of the MA made under the new Capital Rules may apply to the MA for a review of his decision as provided in section 98A(3) as well as apply to the "Capital Adequacy Review Tribunal" (CART) to be established under section 101A which, as provided in the Rules that, section 101B(1) would apply to such a decision;

Power of the MA to vary capital adequacy ratio

  1. increasing to 16% the maximum ratio to which the CAR of a licensed bank may be varied by the MA under section 101(1). This amendment serves to allow the MA more flexibility to set higher minimum CARs if the circumstances so require. The HKMA will issue guidelines setting out its approach to evaluating the capital adequacy of individual AIs, including the factors to be considered by the MA in determining AIs' minimum CAR. Further, there will be an internal review process to ensure the capital adequacy assessments are consistently applied to individual AIs;

Criminal liability of managers

  1. limiting the liability of managers of AIs, for certain offences under the BO, to cases where the contraventions result from an act or omission on the part of the manager personally or of a person under his control by adding a new section 2(18) to the BO;

Defence of "reasonable excuse"

  1. introducing a defence of "reasonable excuse" in sections 59(5) and 63(5) to offences for contravening section 59(2) (i.e. report on matters as the MA may reasonably require for the exercise of his functions under the BO), or section 63(1) (i.e. submission of monthly and quarterly returns), or failing to comply with any requirement under section 63(3) or (3A) (i.e. submission of auditor's report as specifically required by the MA before a specified date) of the BO;

Publication of disciplinary actions in respect of relevant individuals and executive officers

  1. introducing new sections 58A(4A) and 71C(7A) to allow the MA to disclose to the public details of his disciplinary decisions against relevant individuals or executive officers of registered institutions, including the reasons for which the decision was made and any material facts relating to the case.

The provisions of the BAO 2005 will come into operation in phases. Those relating to the new capital adequacy regime will commence operation in accordance with the timetable for implementing Basel II in Hong Kong. Other non-Basel II related miscellaneous provisions will commence operation as soon as practicable. I shall advise you again when the exact commencement dates of the Basel II and non-Basel II related provisions have been finalised.

The MA will start developing the rules to be made under sections 60A and 98A in consultation with the industry. It is intended that the rules will be tabled in the Legislative Council by mid-2006 so as to facilitate AIs' early preparation for implementing the revised capital adequacy standards.

Should you have any questions relating to the BAO 2005, please contact Ms Maggie Leong at 2878 1912 or Ms Rose Luk at 2878 1638.

Yours faithfully,

William A. Ryback
Deputy Chief Executive

Encl.
Banking (Amendment) Ordinance 2005 (PDF file, 116KB)
c.c.
The Chairman, HKAB
The Chairman, DTCA
The Chairman, HKFEDBA
SFTS (Attn: Ms Clarie Lo)
Last revision date: 1 August 2011
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