What Is a Three-Tier Banking System In Hong Kong?

July 9, 2024

What Is a Three-Tier Banking System In Hong Kong?

“In the hands of the right people, banking can be a force for good, enabling progress and prosperity for all.” – Muhammad Yunus.

The banking system of Hong Kong is a testament to these lines of the former MD of the Grameen Bank. Its three-tier banking system has made it an international banking hub. Hong Kong currently has over 70 of the largest international banks in the world. Further, it ranked in the top 10 list of the biggest international banking meccas regarding the volume of external transactions. Read along the blog to understand the three-tier banking system in Hong Kong and how you can get its authorisation.

Three-Tier Banking System: Simplified

It is important to know the regulatory body of the three-tier banking system to understand it. The Hong Kong Monetary Authority (HKMA) controls the banking system in Hong Kong and serves as the country’s de facto central bank. It is responsible for maintaining monetary stability, issuing currency, managing the Exchange Fund, and overseeing the overall stability and soundness of the financial system. Under a three-tier banking system, banks are divided into

Three different types:

Licensed banks #Epitome Of Banking Services
Restricted licence banks #The Precise Artisans
Deposit-taking companies #Versatility Unleashed

These banks are categorised based on the deposit amount, the deposit term, and each one’s business nature. If we delve a little bit deeper into the workings of their banking system, these banks collectively are called Authorised Institutions, supervised by the Banking Ordinance Hong Kong. Apart from these three categories, there are offices of foreign banks, which are also known as representative offices of overseas banks, which are also part of the three-tier banking system in Hong Kong. However, they are outside the regulations of HKMA.

Understanding Different Types Of Banks

Let’s understand these different types of banks one by one:

Licensed Banks in Hong Kong: These banks are mandated by the Banking Ordinance Hong Kong to engage in full banking activities like accepting deposits, providing various accounts, granting loans, and handling cheques. If you are willing to have your licensed banks in Hong Kong, you must meet specific criteria apart from general legal guidelines. Some specific guidelines include holding HK$3 billion in public deposits and HK$4 billion in total assets. Hong Kong hosts 31 locally licensed banks and 120 foreign-incorporated licensed banks as of December 2023.
Restricted Licensed Banks in Hong Kong: These banking systems include merchant and investment banks and have limited banking activities compared to fully licensed banks. They accept deposits starting from HK$500,000, typically for short terms with a maximum maturity of 3 months. Hong Kong hosts 16 restricted licence banks, with ten locally incorporated as of December 2023. These banks cater to specific financial needs under regulatory constraints, focusing on specialised services rather than comprehensive banking operations.
Deposit-Taking Banks in Hong Kong: As the name suggests, these types of banks are focused on accepting deposits from companies established or connected with licensed banks or banks incorporated outside Hong Kong. As part of the three-tier banking system, these banks are allowed to engage in consumer finance, commercial lending, and securities-related business activities. Further, they can accept deposits starting from HK$100,000 with terms exceeding three months. As of December 2023, Hong Kong has 12 deposit-taking companies.

Also read, Banking Industry Records INR 3 Lakh Crore Profit in FY24

How To Get Authorisation?

According to the seventh schedule of the Banking Ordinance Hong Kong, all authorised institutions are required to fulfil certain criteria. Failing to meet any of these requirements will result in the rejection of your application. Below, we have brought you a list of minimum criteria you need to fulfil to get authorisation:

Minimum capital requirement
Fitness and propriety of relevant individuals of the applicant
The adequacy of internal control and accounting systems
The adequacy of information disclosure
The financial stability of the applicant: capital, liquidity, and asset quality
Integrity, prudence, and competence of the applicant’s business

Further, to get yourself registered in the three-tier banking system in Hong Kong, relevant individuals like directors, controllers, chief executives and executive officers of the authorised institution should have good reputation and qualities to suit the position.

The Significance of the Three-Tier Banking System In Hong Kong

The three-tier banking system is integral to Hong Kong’s financial landscape, providing a robust and flexible framework that supports a diverse range of banking services. Additionally, it enables better risk management and regulatory oversight, ensuring the resilience of Hong Kong’s financial infrastructure. As a global financial hub, this structured yet adaptable banking model is essential for sustaining Hong Kong’s economic growth and international financial prominence. We hope you liked this blog; for more such informative blogs, stay tuned with us.

Frequently Asked Questions

What services do licensed banks provide?

Licensed banks in Hong Kong offer a wide range of financial services, including savings and checking accounts, loans, credit cards, foreign exchange services, and investment products.

What is the minimum capital requirement for a licensed bank in Hong Kong?

The minimum capital requirement for a licensed bank in Hong Kong is HK$300 million.

How do licensed banks ensure customer deposit protection?

Licensed banks ensure customer deposit protection through the Deposit Protection Scheme (DPS), covering eligible deposits up to HK$500,000 per depositor per bank.