Total Assets End 2006
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
HK$ Paper HK$ Bank Loans

• Three Tier Structure
Fully Licensed Banks
-23 Locally Incorporated
-108 Foreign Incorporated
Restricted License Banks
33 RLB’s
Deposit Taking Corporations
33 DTC’s

1. Fully Licensed Banks
• Accept deposits of any size or maturity
• 23 incorporated in HK; 114 inc. overseas.
2. Restricted License Banks
• “principally engaged in merchant banking and capital market activities”
• “may take deposits of any maturity of
HK$500,000 .. and above.”
• 17 incorporated in HK; 13 inc. overseas.
See: http://www.info.gov.hk/hkma/eng/bank/index.htm

BANK OF CHINA (HONG KONG) LIMITED
BANK OF EAST ASIA, LIMITED (THE)
CHINA CONSTRUCTION BANK (ASIA) CORPORATION LIMITED
CHIYU BANKING CORPORATION LIMITED
CHONG HING BANK LIMITED
CITIBANK (HONG KONG) LIMITED
CITIC KA WAH BANK LIMITED
DAH SING BANK LIMITED
DBS BANK (HONG KONG) LIMITED
FUBON BANK (HONG KONG) LIMITED
HANG SENG BANK, LIMITED
HONGKONG & SHANGHAI BANKING CORPORATION LIMITED (THE)
INDUSTRIAL AND COMMERCIAL BANK OF CHINA (ASIA) LIMITED
MEVAS BANK LIMITED
NANYANG COMMERCIAL BANK, LIMITED
PUBLIC BANK (HONG KONG) LIMITED
SHANGHAI COMMERCIAL BANK LIMITED
STANDARD BANK ASIA LIMITED
STANDARD CHARTERED BANK (HONG KONG) LIMITED
TAI SANG BANK LIMITED
TAI YAU BANK, LIMITED
WING HANG BANK, LIMITED
WING LUNG BANK LIMITED

3. Deposit Taking Companies
• “mostly owned by, or otherwise associated with, banks.”
• “engage in a range of specialised activities, including consumer finance and securities business. “
• “may take deposits of HK$100,000 … or above with an original term of maturity of at least three months.”
• 33 incorporated in HK; 0 foreign incorporated

9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
-
Licensed Banks
Total Assets
RLB DTC

Share of Assets
Foreign
Incorporated
Licensed Banks
35%
RLB's & DTC's
1%
Locally
Incorporated
License Banks
64%

• Hong Kong banks accept large amounts of foreign currency deposits.
• Small market for Foreign currency loans in
Hong Kong.
• HK banks lend money to banks overseas, multinational banks lend money to firms overseas.

Table 3.9.2 : Balance sheet
1
Licensed banks (HK$ million)
As at end of 11/1/2006
Liabilities
Amount due to authorized institutions in Hong Kong
Amount due to banks abroad
Deposits from customers
Negotiable certificates of deposit outstanding
Other debt instruments outstanding
Capital, reserves and other liabilities
HK$
408,920
188,604
2,717,258
131,012
6,356
685,812
F.C.
210,782
1,534,617
2,147,977
108,290
65,498
319,899
Total
619,702
1,723,221
4,865,235
239,302
71,854
1,005,711
Total liabilities 4,137,961 4,387,062 8,525,024
Assets
Notes and coins
Amount due from authorized institutions in Hong Kong
Amount due from banks abroad
Loans and advances to customers
Negotiable certificates of deposit held :
Negotiable debt instruments held, other than NCDs:
Investments in shareholdings
Interests in land and buildings
Other assets
Total assets
10,546
423,700
352,260
2,056,257
60,506
536,604
38,507
61,193
251,718
3,791,291
3,131
198,240
2,580,466
554,415
40,572
1,018,483
21,499
344
316,582
4,733,733
13,677
621,940
2,932,727
2,610,672
101,078
1,555,086
60,007
61,537
568,300
8,525,024

In the 1950’s
• Modern Local Banks
• Foreign Banks
• Chinese State Banks
• Native Banks
In 1960s, a moratorium on new entrants was instituted until 1978. From 1978-2001, new foreign banks were restricted in attracting business.

Historical Origins
Origins of current licensed banks can be divided into 4 categories
1. Modern Local Banks: Colonial banks and
Chinese banks dating from pre-war period.
( HSBC, Bof EA, ).
2. International Banks – Since the 1970’s, foreign banks have been restricted from entering HK market and are limited to a maximum of 3 branches. Some multinational banks chartered in Hong Kong before that time continue to operate.
( Citibank, StanChart, Bank of America)

3. Chinese State Banks – Chinese government set up banks in HK in pre-war era. After the revolution, these were taken over by PRC. Due to the isolation of PRC, these banks were the main link between the mainland and the world financial system ( Bank of China, Nanyang
Commercial )
4. Native Banks – Banks that serviced the rapidly growing retail markets for small deposits and loans during the immediate post-war migration of immigrants from the mainland ( Hang Seng,
Wing Lung, Dao Heng and many others)

• Before 1948, banking industry was laissez faire. Only issuance of currency was regulated.
• Banking Ordinance of 1948 put minimal regulation in place (largely forced on colonial government by KMT worries about
HK banks being used for illegal purposes).
• Since that time, HK banking history has been one of crisis and response.

• In early 1960’s, many bank runs at native banks that were engaged in margin lending related lending activities forced government bailouts after stock market collapsed.
1. Appointment of Commissioner of Banking
2. Banks were required to keep liquid or liquifiable assets (i.e. government securities) equal to at least 25% of their liquid liabilities (i.e. bank deposits).
3. Banking investments were curtailed. Ability of banks to invest in land or equity of other businesses was limited to small share of banks capital.

• In early 1960’s, many bank runs at native banks that were engaged in margin lending related lending activities forced government bailouts after stock market collapsed.
1. Appointment of Commissioner of Banking
2. Banks were required to keep liquid or liquifiable assets (i.e. government securities) equal to at least 25% of their liquid liabilities (i.e. bank deposits).
3. Banking investments were curtailed. Ability of banks to invest in land or equity of other businesses was limited to small share of banks capital.

•During the early 1960s, there was substantial competition for loans leading to high deposit interest rates. Some blamed these interest rates for risky lending by banks which led to crisis.
1. Exchange Bankers Association agreed in 1964 upon a set of rules for setting deposit interest rate caps.
2. Hong Kong Association of banks formed in
1980 as a statuatory body to set interest rate maximum.
3. In July 2001, cartel completely phased out.

•Crash in real estate market led to bank runs at Ming Tak, Canton Trust, and Hang
Seng. HSBC takes majority stake in 2nd largest deposit bank in HK, Hang Seng.
• To further eliminate “competitive” behavior, banking ordinance is changed to require explicit license from
Commissioner of Banking.
• Commissioner imposes moratorium on new banking licenses until 1978 and re-imposes moratorium until
2001.
• Foreign banks are limited by “one building rule” which limits them to a single branch until 1999, switched to three buildings relaxed in 2001.

• In 1970’s, inflation and interest rates start to raising interest rate spreads for banks. Banks and other companies open DTC’s to compete for funds especially to lend to real estate sector.
• Law passed to create 3 tier structure and limit access of DTC’s to funds. Goes into effect in
1983. Too late
• In 1982, the real estate market crashes leading many DTC’s to collapse. HSBC pledged to support well managed DTC’s ending a spreading crisis.

0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
% Lending by RLBs and DTCs

•In 1985, a large number of banks take losses on risky lending. Several banks must be bailed out by government/HSBC
1. Commissioner of Banking given ad hoc powers to regulate bank lending.
2. Banks are required to keep capital equal to 8% of risk weighted assets.

Top firms control a huge fraction of banking assets, 2005
HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED (THE)
BANK OF CHINA (HONG KONG) LIMITED
HANG SENG BANK LTD.
STANDARD CHARTERED BANK (HONG KONG) LIMITED
BANK OF EAST ASIA, LIMITED (THE)
DBS BANK (HONG KONG) LIMITED
INDUSTRIAL AND COMMERCIAL BANK OF CHINA (ASIA) LIMITED
WING HANG BANK LTD.
CITIBANK (HONG KONG) LIMITED
NANYANG COMMERCIAL BANK, LIMITED
Total Assets
Billions of HK$
2672
822
581
337
239
186
115
104
95
95

# of Locally Incorporated Banks
34
32
30
28
26
24
22
20
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

• Hong Kong economy has shifted toward entrepot trade.
• HK businesses are integrating with mainland.
• HK Banks cannot integrate fully due to
Chinese regulations.
– End of 2006, Foreign Banks can incorporate in China and 12 HK institutions have.

40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
M an uf ac tu rin g
Tr an sp or t
P ro pe rty
Tr ad e
Fi na nc e
M or tg ag es
Jun, 1967 Jun, 1977 Jun, 1987 Jun, 1997 Jun, 2007
O th er

Manufacturing
Transport
Property
Trade
Finance
Mortgages
Other
Jun, 1967 Jun, 1977 Jun, 1987 Jun, 1997 Jun, 2007
21.12% 13.03%
3.82% 7.82%
8.63%
5.87%
6.01%
4.71%
5.02%
5.71%
16.19% 8.27% 11.55% 21.43% 23.18%
32.14% 34.10% 11.48% 10.45% 4.95%
3.50% 9.88% 10.00% 13.43% 15.03%
8.11% 12.11% 19.03% 25.48% 26.53%
15.11% 14.79% 33.44% 18.49% 19.56%

Loans for Use outside HK
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%

• KPMG Banking Survey Report 2007
• Schenk, C. Banking Crises and the Evolution of the Regulatory Framework in Hong Kong 1945-
70’, Australian Economic History Review , 43(2),
July 2003. Article
• Schenk, C., Hong Kong as an International
Financial Centre: emergence and development
1945-65 , Routledge, 2001
• HKMA
– GUIDE TO HONG KONG MONETARY AND
BANKING TERMS. 3RD EDITION
– Annual Report: Banking Stability