Market entry criteria


13 Dec 2001

Market entry criteria

The HKMA is currently consulting the banking industry on whether the minimum size criterion for licensing foreign banks in Hong Kong should be changed.

Readers are aware of our view that the US$20 billion hurdle, in the form of a minimum asset size criterion for the establishment of a branch of a foreign bank in the Mainland, is too high. Indeed, this view has been repeatedly expressed to the Mainland authorities in our frequent contacts with them, bearing in mind, of course, the strong and general desire for banks incorporated in Hong Kong to participate in banking business in the Mainland and to contribute to the Mainland's growth and development. Individual banks in Hong Kong have also been lobbying hard for a change in that policy or at least a flexible application of it. This is receiving sympathetic consideration by the authorities in the Mainland, but national treatment considerations and the specific commitment associated with accession to the World Trade Organisation have made this difficult.

One of the arguments that we have been using in our discussions with the Mainland authorities is that, in banking, asset size is not necessarily a reliable measurement of quality. This is notwithstanding the very clear and global trend in the industry towards consolidation, as technology rapidly changes the mechanism for the delivery of banking services, requiring the creation of electronic platforms that can only be cost effective when there is a certain critical mass. Indeed, there continues to be considerable demand for banking services that require personal contacts rather than impersonal delivery channels, and in-depth personal knowledge rather than a set of well presented numbers. This is particularly so in a developing economy with vast geographical coverage and great diversity in financial penetration, and where, generally speaking, channels of financial intermediation are still being established rather than gaining in sophistication. In the provision of banking services in such an environment, a large size may even be a disadvantage. In any case, the best approach seems to be to let the market decide, in a freely competitive environment, on what is the optimum size for a bank in the provision of the type of banking services that an economy needs.

There is, of course, the additional need for the bank regulator to ensure the stability and integrity of the banking system, in order that the important role of financial intermediation performed by the banks should not be disrupted and economic development undermined. That is why there are licensing criteria imposed, basically to let in the strong and prudent banks, and keep out the weak and risky ones; and those that have been let in are supervised closely. But, in the licensing of foreign banks, size is more a convenient rather than a logical hurdle. It is, in fact, not a common licensing feature in the major international financial centres. There are more objective measurements of the quality of a bank, including capital adequacy, asset quality, fitness and probity of the bank management as well as its major shareholders, and so on.

Having said all this, I must point out, in case readers have not noticed, that we are in the embarrassing position that we too have a minimum size criterion in Hong Kong for the licensing of foreign bank branches. Some minimum balance sheet criteria are necessary, in particular for local banks, to ensure a meaningful existence, in terms of the banking services provided, rather than treating a banking licence as an investment. But the substantial criterion of US$16 billion is far too big for this purpose. And it does not really help our case in our discussion with the Mainland authorities to get our local banks in. We have, in fact, introduced flexibility in the application of this minimum size criterion, in that we have the power to override it when, in our opinion, that would help promote the interests of Hong Kong as an international financial centre. But we are feeling increasingly uncomfortable about it.

We should of course practice what we preach. There is now little or no concern about over-banking in Hong Kong, which was one important reason for the size criterion when it was first introduced. Indeed, we have just removed all branch restrictions for foreign banks licensed in and after 1978 as part of our efforts to strengthen the banking system through competition. Furthermore, with Hong Kong aspiring to be the international financial centre in this time zone, it will be to our advantage to remove unnecessary restrictions on the licensing of banks. For these reasons we are currently consulting industry associations on how the asset size criterion for licensing might be rationalised.


Joseph Yam

13 December 2001


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