The three-tier system

Guideline No. 1.1

The Three-Tier System

1. In June 1987, my predecessor published a series of papers on the three-tier system of deposit-taking institutions. These papers presented options for change to the system, and invited comments. There followed a lengthy and fruitful period of consultation with the Hong Kong Association of Banks, the Hong Kong Deposit-taking Companies Association, the Banking and Deposit-taking Companies Advisory Committees, other associations and individual institutions.
2. In the light of those consultations, the Executive Council has now approved changes to the present system. These changes have the purpose, on the one hand, of providing greater scope and standing for the more substantial, well capitalised and well run institutions and, on the other, to strengthening the authorisation criteria for deposit-taking institutions. The changes should facilitate the further development of Hong Kong as a financial centre, and enhance the protection afforded depositors.
3. The proposals which Executive Council has approved are described in the following paragraphs.

Proposals

4. The essential feature of the proposals is that the present categories of licensed deposit-taking company (ldtc) and registered deposit-taking company (rdtc) will be replaced by two new authorisations: 'restricted licence bank' (rlb), and 'deposit-taking company' (dtc). There will be no change in respect of licensed banks (except that the minimum paid-up capital for locally incorporated banks will be increased from $100 mn at present to $150 mn).

Restricted licence bank

5. The category of rlb will replace that of ldtc. They will have greater scope in business descriptions: they will be able to use the word "bank" in describing their business in promotional publications, advertisements etc., but qualified by such adjectives as "restricted", "merchant", or "investment"; descriptions such as "retail" or "commercial" will not be allowed, as inappropriate, and to avoid confusion with licensed banks. This easement aims at meeting the concern expressed by a number of the substantial dtcs over their inability, legally, to describe themselves as, say, "merchant banks", and over the fact that internationally the term "deposit-taking company" is either misunderstood, or seen as pejorative, or both.
6. Banks incorporated overseas and seeking authorisation as rlbs will be able to operate in either branch or subsidiary form. If in branch form, they will have greater scope in the use of their registered name: if that name includes the word "bank", the may carry on business at a branch in Hong Kong with their banking name but qualified prominently by the words "Restricted Licence Bank" in immediate conjunction. See examples in Annex A.
7. To reflect the additional status and privilege, the present minimum paid-up capital of $75 mn for ldtcs (in effect since 1981) will be increased to $100 mn for rlbs. Existing ldtcs which are in branch form will be grandfathered as rlbs. Ldtcs which are locally incorporated will also be grandfathered as rlbs if their capital meets the new minimum requirement; those that do not meet the requirement will be grandfathered as deposit-taking companies ^{see following section.}
8. Overseas banks newly authorised as rlbs and operating in Hong Kong in branch form will be allowed to operate only from offices in one building (the same condition that applies to newly licensed banks incorporated overseas). However, locally incorporated companies, or existing ldtcs which are branches and grandfathered as rlbs, will not be subject to this restriction though the Commissioner of Banking's approval will still be required before a new branch office can be established.

Deposit-taking company

9. The rules for the new dtc category will be little changed from those applicable to rdtcs at present. However, to add assurance that only sound institutions are entrusted with public deposits, the minimum paid-up capital for dtcs will be raised from $10 mn for rdtcs (in effect since 1981) to $25 mn. This will apply immediately to new dtc registrations (a notice will be gazetted on 10 March) , but existing rdtcs (to be grandfathered as dtcs) will be given two years - until 10 March 1991 to reach the new minimum.
10. Rdtcs expressed concern, during consultation, about their inability to take short-term deposits, a restriction which hampers their business scope. Given the differing quality of the exisinq rdtcs, it is considered that any relaxation in this regard should wait until the dtc sector has further consolidated itself. It is unlikely that any consultation on further changes will commence until after the two-year period leading to the higher capital requirement.

Authorisation

11. New authorisations as rlbs and dtcs will be restricted to overseas banks or, as at present for dtcs, to companies at least half owned by banks, except that
    

    (a)	all existing rdtcs will be able to apply for rlb authorisation if they meet the prudential and size standards, and
    (b)	it will be possible exceptionally for financial institutions, other than banks, to satisfy the 50% ownership requirement provided that they are adequately supervised, and of appropriate standing.

12. An applicant for rlb authorisation will have to satisfy similar criteria as for ldtcs at present, except that it will not be necessary for it first to have been a dtc before becoming an rlb. The authorisation criteria for rlbs are at Annex B. They include specifically a "fit and proper" requirement. In determining whether a body is "fit and proper" to take deposits, the Financial Secretary will have regard to, inter alia, the adequacy of its capital (in relation to its business) and human resources.
13. An applicant for dtc authorisation will also have to satisfy the Commissioner, inter alia, that it is "fit and proper". The authorisation criteria for dtcs are at Annex C.

Implementation

14. Amendments to the Banking ordinance will be necessary to effect the changes described above. It is intended to introduce a Bill to the Legislative Council this year. The revised minimum capital requirement of $25 mn for dtc registration, however, will take effect from 10 March 1989.