The Memorandum of Understanding signed this week between the HKMA and the newly established China Banking Regulatory Commission provides a blueprint for co-operation between the two supervisory authorities at a time when cross-border banking business continues to grow.
Earlier this week I went to Shanghai and, on behalf of the HKMA, signed a Memorandum of Understanding with Mr Liu Mingkang, Chairman of the newly established China Banking Regulatory Commission (CBRC). The HKMA has, over the years, signed a number of similar memoranda with the banking regulators of other jurisdictions where there are cross-jurisdiction banking operations in the form of branches and subsidiaries. The MOU with the CBRC is, arguably, the most important one signed, given that the presence of banks from one jurisdiction in the other, and vice versa, is already quite substantial and increasing rapidly along with economic integration between the Mainland and Hong Kong.
The MOU between the CBRC and the HKMA establishes a formal framework for co-operation. This is particularly useful given the significant, structural differences between the banking systems in the two jurisdictions. These differences, reflecting historical developments, and the contrasts in the political and economic characteristics between the two systems, inevitably involve different governance arrangements practised by banks. They also involve the use of different approaches to banking supervision, in form but perhaps not so much in spirit, and different degrees of freedom allowed for in the conduct of banking business. The different practices and approaches create challenges for both the banks operating in the two jurisdictions and for the supervisors with responsibility over the general stability and effective working of their respective banking systems. This makes dialogue and co-operation between the CBRC and the HKMA that much more important.
Supervisory co-operation starts with information sharing and this is one of the important subjects spelt out in the MOU. There is an undertaking that both sides will notify and provide relevant information to each other whenever there is a "material supervisory concern" in respect of banks from each other's jurisdiction. Where remedial action is called for to address such a concern, we will also notify each other as soon as possible and, where possible, before the appropriate supervisory action is taken. In the event that a bank in one jurisdiction encounters financial difficulties that could have a material adverse impact on the operations of the same bank in the other jurisdiction, there will obviously be a need for close liaison between the supervisory authorities, including the communication of appropriate information. There are arrangements in the MOU concerning this. The MOU also covers the provision of information obtained as part of the supervisory process on request between the supervisory authorities, to the extent permitted by law. The MOU contains stringent confidentiality provisions.
There is obviously a need for the two supervisory authorities to work closely in view of the many developments of mutual interest taking place in their respective banking systems. Continuous, informal contacts will in practice be maintained for this purpose among staff at the working level, but it is also considered necessary to hold formal, regular meetings twice a year between representatives of the CBRC and the HKMA. The opportunity was taken on the occasion of the signing of the MOU earlier this week in Shanghai to have the first such meeting, which turned out to be a most constructive one covering a wide range of issues.
Hitherto, when acting on an application from a bank from the other jurisdiction for the establishment of branches or subsidiaries, or for the acquisition of "the qualified holding of shares" of a bank, in the home jurisdiction, the supervisory authorities have a practice of seeking prior agreement from each other. This has now been formalised in the MOU, with "the qualified holding of shares" set at a threshold of 10% of the shares in the bank being acquired. There is also a formal requirement in the MOU for the notification of each other when planning to conduct on-site examinations of the branches and subsidiaries of domestic banks operating in the other jurisdiction. Each supervisory authority may also request the other to conduct such on-site examinations on its behalf.
The signing of the MOU marks a very good beginning of a close working relationship between the CBRC and the HKMA. It provides a very good foundation for co-operation between the two supervisory authorities as cross-border banking activities continue to grow in the years to come.
Joseph Yam
28 August 2003
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