Understanding Hong Kong Three-tier Banking System

Hong Kong’s banking system is characterized by a three-tier system, including Licensed banks, Restricted banks, and Deposit-taking companies. In this blog, we will delve into the key features of each type and how they work.

A glance at the banking system in Hong Kong

The banking sector is of vital significance in the economic development of Hong Kong.

Not only has Hong Kong become flourishing in terms of offshore banking, but also a strong linkage between Hong Kong and offshore renminbi business to Mainland China has attracted much attention from most foreign investors in recent years.

Hong Kong is deemed a globally well-reputed financial hub. There are more than 70 of the world’s 100 largest banks in Hong Kong. With the high concentration of international banks, Hong Kong is listed in the top ten biggest international banking meccas when it comes to the volume of external transactions.

The banking system in Hong Kong is regulated under the Hong Kong Monetary Authority (HKMA). Except for the issuance of banknotes, most of the key duties of a central bank will be performed by HKMA. Hong Kong banking system is characterized by four main types of banks:

• Licensed banks
• Restricted license banks
• Deposit-taking companies
• Offices of foreign banks (Representative offices of overseas banks)

Other than representative offices, the banking system in Hong Kong is dominated by its three-tier system including three types of banking institutions as above.

This system is categorized on the amount of deposit, term of the deposit, and each one’s business nature. They are also collectively known as Authorized Institutions (AIs) supervised under the Banking Ordinance.

As per HKMA’s latest update to December 2023, the number of authorized institutions in Hong Kong has revealed 151 licensed banks, 16 restricted banks, and 12 deposit-taking companies.

Furthermore, the jurisdiction has 42 local representative offices of overseas banks, 8 locally incorporated companies in Hong Kong granted licenses for virtual bank operations and 30 money broker approvals by the HKMA.

It should be noted that there are certain requirements as well as restrictions among the three types.

It is also interesting to know that only restricted banks and licensed banks – the first two forms – can be deemed as banks. In what follows, we will delve into key features of the three-tier banking system in Hong Kong.

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Features of the three-tier banking system in Hong Kong

The three-tier banking system in Hong Kong ensures a diversified and well-regulated banking sector that caters to various financial needs. Let’s delve into the features of each type to get a better understanding.

Licensed banks

Only this type of bank may carry out “banking business” related activities as prescribed under the Banking Ordinance. These activities can be accepting deposits, providing retail customers current, checking, savings, or other similar accounts, granting loans, paying or collecting cheques drawn paid in by customers, etc. Licensed banks are allowed to accept any deposits regardless of size and maturity.

The minimum capital requirement (including paid-up share capital and balance of share premium account) for licensed banks is HK$300 million, which is much higher than that for the other two types of banks.

It should also be noted that only licensed banks in Hong Kong must observe the minimum-size criteria required to hold HK$3 billion public deposits and have total assets of at least HK$4 billion.

As of 31 December 2023 report, Hong Kong has 31 domestically licensed banks and 120 licensed banks incorporated outside Hong Kong. Licensed banks in Hong Kong protect their depositors through the Deposit Protection Scheme with the allowable maximum protection of up to HK$500,000 per depositor.

Restricted license banks

Restricted license banks are merchant banks and investment banks. This type of bank is not allowed to carry out a range of banking businesses like the above-mentioned fully licensed banks. As its name denoted, there is a restriction for restricted banks. In terms of deposits, the bank only accepts deposits of no less than HK$500,000.

Another key to mention is that restricted banks in Hong Kong typically take deposits for short-term periods with either a period of notice or an original term to maturity of 3 months at maximum. In Hong Kong, a total of 16 restricted license banks, including 10 banks incorporated in Hong Kong are available.

Deposit-taking companies

These are companies established or connected with licensed banks or banks incorporated outside Hong Kong. Deposit-taking companies are allowed to engage in consumer finance, commercial lending, and securities-related business activities.

Unlike the other two types of deposit-taking institutions, these companies may take deposits of HK$100,000 or above with an original term to maturity lasting more than 3 months.

Up to now (as of December 2023 update from HKMA), 12 deposit-taking companies in Hong Kong are all incorporated inside Hong Kong.

Key takeaways

What highlights of these tiers should you keep in mind? Since each poses distinct features and roles within the financial landscape of Hong Kong, this might help you navigate better:

Licensed banks

• Can be used for current and saving accounts
• Accept deposits of any size and maturity from the public
• Minimum capital requirement is HK$300 million
• Can be incorporated inside or outside Hong Kong
• Virtual banks are allowed in Hong Kong and categorized as licensed banks

Restricted license banks

• Can be used for capital market and merchant banking activities
• Accept deposits of any maturity of HK$500,000 and above
• Minimum capital requirement is HK$100 million
• Can be incorporated inside or outside Hong Kong

Deposit-taking companies

• Not deemed as banks
• Can be used for specialized activities (e.g. consumer finance, securities business, commercial lending, etc.)
• Accept deposits of HK$100,000 or above with an original term of maturity of at least three months
• Minimum capital requirement is HK$25 million
• Must be incorporated in Hong Kong

Together, these tiers contribute to the robustness, stability, and international connectivity of Hong Kong’s banking sector.

The banking system in Hong Kong & other related matters

Criteria for authorization

All authorized institutions in Hong Kong are subject to the minimum criteria for authorization as prescribed in the Seventh Schedule to the Banking Ordinance.

If any banking applicants do not satisfy one of these criteria, the HKMA may reject their application. Note that such conditions must be met and maintained both at the time of application being made and after authorization.

Below are the key criteria that applicants should bear in mind:

• 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

The fitness and propriety of relevant individuals is one important criterion. Relevant individuals comprise directors, controllers, chief executives as well as executive officers of the authorized institution. Those must have appropriate reputation, knowledge, and qualities to suit the positions appointed, assessed by HKMA.

In addition, the applicant must guarantee financial stability. Particularly, the institution is required to perform sufficient capital according to the measure of capital standards by the Basel Committee.

Adequacies of the appointment control system, home supervision, or liquidity are other considerations for applicants as authorized institutions to satisfy HKMA requirements. For more information, please refer to HKMA websites or consult legal experts.

Deposit Protection Scheme

The Deposit Protection Scheme (DPS) was launched in 2006 under the Deposit Protection Scheme Ordinance. This scheme is to protect deposits held by licensed banks in Hong Kong by giving them compensation in case of bank failure.

Keep in mind that deposits, if eligible, will be put under the protection of the DPS automatically; therefore, they do not need to apply for compensation.  Depositors covered under the DPS of Hong Kong, whether to be individuals or companies, can be compensated up to a max of HK$500,000.

Deposits qualifying with this scheme include conventional deposits like savings, current accounts, time deposits time with a term not exceeding 5 years, secured deposits, and any deposits by individuals and corporations, except for structured deposits, offshore deposits, or bearer instruments.

Moreover, protected deposits can be in the HK dollar, renminbi, or any kind of foreign currency. However, deposits taken by restricted license banks and deposit-taking companies are not under the protection of this scheme.

Virtual banks

A virtual bank does not deliver its business activities in physical branches. It refers to the bank principally conducting retail banking services via the Internet or some other means of electronic vehicles.

Key requirements of virtual banks in Hong Kong

• Virtual banks are subject to a set of supervisory obligations as same as the conventional banks in Hong Kong, including the minimum requirement for authorization under the Seventh Schedule of the Banking Ordinance.
• Virtual banks in Hong Kong shall not impose any minimum account balance requirement/ low-balance fees on the bank’s customers.
• Virtual banks should be formed as locally incorporated banks. Maintaining a physical presence is a must for any virtual bank applicant in Hong Kong.
• Virtual banks are required to maintain adequate capital which must be well-matched with their operations and banking risks. Terms and conditions upon the benefits and obligations of the bank and customers must also be set out from the bank’s commencement.

The emergence of virtual banking in Hong Kong plays an important role in marking the footstep of Hong Kong into the Era of Smart Banking. Currently, there are 8 virtual banks in Hong Kong.

To get a virtual bank licensed in Hong Kong, there are several important documents submitted on the application, some of which include a credible and viable business plan, an exit plan, an assessment report of its technology system, a description of risk-based management, etc.

The list of all the above-mentioned types in Hong Kong banking systems can be found in the List of Hong Kong banks in the category of license banks, restricted banks & deposit-taking companies (for reference).

Please note that you should not misunderstand the concept of Virtual Banks with fintech platforms, aka Money Service Operators (MSOs) in Hong Kong. A big plus for these fintech solutions is that you do not need to visit Hong Kong for opening a bank account. The presences of MSOs increasingly become a widely-used alternative to traditional banks and virtual banks in Hong Kong.

Learn more: Alternatives to traditional bank accounts in Hong Kong 

In case of any concerns regarding Hong Kong’s banking system or doing business in Hong Kong in general, don’t hesitate to get in touch with us via service@bbcincorp.com. for more information and practical solutions.