Hong Kong is one of the fastest growing international finance centers in the world. It services its domestic economy, China and the Southeast Asian region. Hong Kong’s banking industry is very robust with 68 of the world’s 100 largest banks having a presence here. Hong Kong is also reputed for having a high quality of banking industry regulation. Currently, there are 145 licensed banks, 27 restricted license banks and 28 deposit taking companies in operation in Hong Kong. Of these 200 authorized institutions, 181 are beneficially owned by sovreign entities from 29 countries.

Factors that have contributed to the success of Hong Kong’s banking industry include:

• Strong domestic banking market dominated by the HSBC Group that has become a strong international financial institution in its own right.
• Growth of foreign banks that was facilitated by a number of initiatives such as lifting restrictions on the number of branches a foreign bank could maintain and lifting restrictions on eligibility criteria for grant of banking licenses to foreign banks.
• Regulatory authorization for a wide range of banking services from deposit taking, trade financing, loan syndication to foreign exchange trading.
• Strong emergence of the private banking sector due to Hong Kong’s strict anti-money laundering provisions, non-discriminatory low tax regime and availability of sophisticated wealth management services.

This guide provides an overview of Hong Kong’s banking industry including its key trends, the major domestic and international players and the role of the Hong Kong Monetary Authority.

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Hong Kong’s Banking Industry Trends

Liberalization of the Banking Sector

During the 90s Hong Kong’s banking sector was characterized by a highly concentrated domestic market structure, dominated by the HSBC Group. In a bid to boost Hong Kong’s position as an International Finance Centre and open up the foreign banking market, the Hong Kong Monetary Authority (HKMA) introduced a number of measures.

• In 2001 it lifted all restrictions on the number of branches that foreign banks could maintain in Hong Kong.
• In 2002 it lifted the market entry criteria for foreign banks. Previously, to be considered for a banking license, a foreign bank had to maintain a representative office for 1-2 years in Hong Kong. Foreign banks also had to satisfy the US$16 billion asset size criterion. Recognizing these criteria as impediments to the expansion of its international financial services market, the HKMA dropped the representative office requirement and relaxed the balance sheet size criteria to HK$3 billion for customer deposits and HK$4 billion for total assets.
• Overseas banks that do not qualify for a full banking license were allowed to establish Restricted Licensed Banks and Deposit-Taking Companies in order to conduct wholesale and investment banking practices.

Furthermore, a number of liberalization measures have been introduced from time to time under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA). The new measures benefit Hong Kong s banking industry, providing market entry and business expansion opportunities in the Mainland.

Growth of the Private Banking Industry

Hong Kong is one of the premier wealth management centers in the world and Asia’s largest private banking market. Moreover, with Asia-Pacific positioned as the fastest growing wealth management market in the world, Hong Kong’s private banking industry has seen robust growth in recent years.

Swiss players such as UBS and Credit Suisse and other major players in the private banking industry such as Standard Chartered Bank and HSBC, provide a wide range of wealth management services such as advisory investment services, low risk asset growth, corporate product support, estate planning and so on. Hong Kong’s private banking industry growth is attributable to its strict anti-money laundering laws and generous tax incentives. For example, there is no capital gains tax and no tax on overseas dividend income.

Development of the Investment Banking Sector

Hong Kong’s position as the commercial capital of Asia quite naturally spurred the growth of investment banking services. Today, a number of investment banks in Hong Kong offer a host of services such as issuing securities (underwriting), managing portfolios of financial assets, trading of securities (stocks and bonds), helping investors purchase securities and providing financial advice and support services.

Hong Kong’s private sector bond market is one of the largest and most liquid in the Asia-Pacific region. Institutional and retail investors benefit from electronic bond trading platforms. Moreover, the listing of the Pan Asia Bond Index Fund (foreign bond fund with access to the Mainland’s interbank bond market) on the Hong Kong Stock Exchange helped open up China’s bond market to foreign participants. The Hong Kong Stock Exchange is third largest in Asia in terms of market capitalization. Additionally, Hong Kong has a highly regulated securities and futures market.

Types of Banks

Most banks in Hong Kong cater to different types of clients – individuals, corporations or government agencies. These banks provide commercial banking (catering to businesses and corporations), retail banking (catering to individual members of the public) and private banking (catering to High Net Worth Individuals) services.

Hong Kong maintains a three-tier system of deposit-taking institutions:

• Licensed banks: In Hong Kong, only licensed banks can operate current and savings accounts, accept deposits of any size and maturity from the public and pay or collect checks drawn by or paid in by customers. There are currently 23 licensed banks incorporated in Hong Kong and 125 licensed banks incorporated outside Hong Kong.
• Restricted license banks: Restricted license banks are principally engaged in merchant banking and capital market activities. They can take deposits of any maturity of HK$500,000 (approximately US$64,103) and above. There are currently 14 restricted license banks incorporated in Hong Kong and 12 restricted license banks incorporated outside Hong Kong.
• Deposit taking companies: Deposit taking companies are owned by or otherwise associated with banks. These companies engage in a range of specialized activities, including consumer finance and securities business. They may take deposits of HK$100,000 (approximately US$12,821) or above with an original term of maturity of at least three months. There are currently 28 locally incorporated deposit-taking companies.

Major Banks in Hong Kong

Local Banks

• HSBC: The Hongkong and Shanghai Banking Corporation Limited was established in Hong Kong and Shanghai in 1865. It is the founding member of the HSBC Group and is its flagship in the Asia-Pacific region. Its headquarters are in the Hong Kong SAR, where it is the leading and largest bank incorporated in Hong Kong.
• Hang Seng Bank: Established in 1933 Hang Seng Bank is a principal member of the HSBC Group, which is among the world’s largest financial services organizations and holds a 62.14% equity interest in the bank. Its consolidated assets as of 30 June 2009 amounted to HK$790.1 billion. It is also the largest locally incorporated listed bank in Hong Kong in terms of market capitalization.
• Bank of East Asia (BEA): Incorporated in Hong Kong in 1918, BEA operates one of the largest banking networks in Hong Kong, with total consolidated assets of HK$411.9 billion. The BEA has won many accolades such as the “Best retail Bank in Hong Kong”, “SME’s Best Partner Award” etc.

Foreign Banks

• Bank of China (BOC): BOC, one of China’s four state-owned commercial banks set up operations in Hong Kong in 2001. The bank is mainly engaged in commercial banking, including corporate and retail banking, treasury business and financial institutions banking. As a Chinese financial institution with a history of almost a hundred years, the Bank is well known for its continuous business innovations and has introduced many new products and services.
• Citibank: Citibank is a major market player in Hong Kong with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management.
• Standard Chartered Bank (SCB): Standard Chartered’s Hong Kong operations began in 1859 and today it is the one of the SAR’s three note-issuing banks. It is one of the most trusted banks in Hong Kong and is well known for its standard of governance.

Bank Regulations and Legislation

The Hong Kong banking legislations not only regulate the banking sector in Hong Kong, but also ensure that the legal framework for banking in Hong Kong keeps pace with the latest developments in the financial world. The principal legislations pertaining to the banking industry include the Banking Ordinance and the Securities and Futures Ordinance. Additionally, Hong Kong also has provisions to counter money laundering and terrorist financing.

Role of Hong Kong Monetary Authority

The Hong Kong Monetary Authority (HKMA) was established on 1 April 1993 by merging the Office of the Exchange Fund with the Office of the Commissioner of Banking. The HKMA is responsible for the following:

• Maintaining monetary and banking stability
• Supervising the banking industry
• Governing the licensing of institutions seeking to operate banking businesses
• Proposing reforms to the Banking Ordinance to ensure that it remains up to date and relevant