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CEP Industry Research

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  1. CEP Industry Research Hong Kong Financial Regulators Group 6

  2. HKMA & SFC

  3. Hong Kong Monetary Authority • Securities and Futures Commission

  4. HKMA

  5. Hong Kong Monetary Authority • Was established on 1st April 1993 • Merged the Office of the Exchange Fund and the Office of the Commissioner of Banking • Aim:To maintain the monetary and banking stability • Exchange Fund Ordinance • Banking Ordinance

  6. HKMA Function • Keeping Hong Kong dollar stable • Managing the Exchange Fund • Promoting safety of Hong Kong’s banking system • Enable money to flow smoothly, freely and without obstruction

  7. Banking policy and supervision

  8. Departments involved in MA • Banking Supervision Department • handles the day-to-day supervision of authorized institution. • Banking Policy Department • formulates supervisory policies to promote the safety and soundness of the banking sector. • Banking Development Department • formulates policies to promote the development of the banking industry.

  9. Three-tier Banking System • Licensed banks, restricted licensed banks and deposit-taking companies • 73 of the largest banks in the world • In May 2003, 135 licensed banks, 43 restricted licensed banks and 40 deposit-taking companies • 92 Local Representative offices of overseas banks

  10. Authorization • responsible for authorization, suspension & revocation. • conducts periodic reviews • introduces amendments to reflect the changing needs of the regulatory environment • only fit and proper institutions are entrusted with public deposits.

  11. Regulatory Framework • The Banking Ordinance • section 7(1): principal function of the Monetary Authority • "promote the general stability and effective working of the banking system • Follow international practices recommended by Basle Committee on Banking Supervision (Basle Committee)

  12. Continuous Supervisory Approach • On-going monitoring of institutions • Aim: To detect any problem at an early stage • Activities Involves: • on-site examinations • off-site reviews and prudential meetings • co-operation with internal and external auditors • sharing information with other supervisors

  13. Risk-based supervision • Risk assessment approach and quality assurance programme • Evaluation of the quality of risk management practices and internal controls of various types of risks faced by the institutions. • Examples of Risks • Credit Risk • Interest Rate Risk • Market Risk • Liquidity Risk • Operational Risk • Reputation Risk • Legal Risk • Strategic Risk

  14. CAMEL Rating • Aim: To help identify those institutions whose weaknesses in financial condition, compliance with laws and regulations, and overall operating soundness require special supervisory attention • Capital Adequacy • Asset Quality • Management • Earnings • Liquidity

  15. Capital Adequacy Ratio (CAR) • The ratio of an authorized institution's capital base to its risk-weighted credit exposures • Third Schedule to the Banking Ordinance • Locally incorporated authorized institutions : minimum 8% capital adequacy ratio • Maximum: licensed bank (12%), Deposit-taking company or a restricted licensed bank(16%)

  16. Supervision of Liquidity • Aim • To ensure to meet their obligations when they fall due • maintain adequate stock of high quality liquid assets • Six factor • liquidity ratio • maturity mismatch profile • ability to borrow in the interbank market • intra-group transactions • loan to deposit ratio • diversity and stability of the deposit base

  17. Loan Classification System • Set up in December 1994 • Report on a quarterly basis • Classification • Pass • Special Mention • Substandard • Doubtful • Loss

  18. Derivatives and Risk Management • A proactive approach in the supervision of • 3 C • Controls - AIs have adequate internal control systems? • Capital - AIs have adequate capital to support possible losses ? • Capability - Adequate expertise within the HKMA to develop risk management policies and to supervise AIs' derivatives activities?

  19. Financial Disclosure • Aim: Relevant, reliable and timely information • Frequency of Disclosure • Annual & Interim - locally incorporated authorized institutions • Half-yearly - overseas incorporated institutions. • Financial information to be disclosed: • Income statements • Balance sheets • Cash flow statements • Off-balance sheet exposures • Maturity profiles & Asset quality • Segmental information • Foreign currency exposures & Risk management • Capital adequacy & Liquidity information.

  20. SFC

  21. Securities and Futures Commission • After market crash of October 1987, Securities Review Committee was appointed by Government to review securities industry • SFC was born in May 1989 • Licensing and supervision of intermediaries and focus on secondary market • Encourage market development • Protect investors

  22. Regulatory structure

  23. Roles and functions Regulatory objectives: • to maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of the industry • to promote understanding by the public about th operation and functioning • to provide protection for members of the public investing in or holding financial products • to minimize crime and misconduct • to reduce systemic risks in the securities industry • to assist the Financial Secretary in maintaining the financial stability of Hong Kong

  24. Organization Structure • Four operating divisions • Corporate finance: regulate takeovers and mergers, administer securities regulation relating to listed companies and supervise listing –related activities of SEHK • Intermediaries and investment products: licensing, supervision of intermediaries and marketing to public of collective investments schemes

  25. Organization Structure • Supervision of markets: market oversight to ensure sound functioning and developing of trading, settlement and operational systems; administer two statutory investment compensation funds • Enforcement: undertake enquiries into alleged breaches of relevant Ordinances and Codes

  26. Responsibility of SFC • Ensure full disclosure • Monitor trading of shares and options • Conduct periodic inspection visits • Handle complaints about misconduct • Inspect books and records • Regulate for takeovers and merger activity

  27. Powers in relations to offences and misconduct • Prosecution 2) Court order 3) Revocation Maximum penalties • On summary conviction Fine $100,000 6 months’ imprisonment • On indictment Fine $ 10,000,000 7 years’ imprisonment