Law Relating to Banking in Hong Kong

8.Banking Regulation

Chapter฀8฀ Banking฀Regulation฀ 8.1฀Histor y฀o f฀Bankin g฀Legislatio n฀ Between 184 1 and 1948 , banking law and practice in Hong Kong evolved fro m Englis h Commo n La w an d bankin g practice . Thi s law and practice, which did not originate locally, nevertheless had lasting effects o n practices here, especially i n the relationship between ban k an d custome r i n contrac t an d tort . Throughou t thi s period, ther e wa s n o legislatio n fo r th e regulation o f banking , i n either Hong Kong or England. The lack o f banking legislatio n i n Hong Kon g shoul d no t b e interpreted a s a sign of financial stability. Hong Kong suffered it s first banking crisis in 1866, when six of the eleven banks operating in Hon g Kon g failed . However , thi s an d othe r bankin g crise s o f later years did not convince the Government that legislative power should be invoked to protect the general public against bad banking practices. Indeed, it was the laissezfaire er a and the making of law to interfere wit h the freedom o f business activities was thought to be undesirable, especially in banking. During 1946-47 , there was a sudden increase in the number of persons and organizations in Hong Kong engaged in banking. Most were sole proprietorships or partnerships. Only a handful were companies incorporated under the Companies Ordinance 1932. Many of these new 'banks ' wer e regarded by the authorities a s having n o value to Hong Kong because, as the government said, they were 'engaged in speculation or in the infringement of trade or exchange control regulations of the Chinese Government and of this Colony'. The government considered it timely then to introduce some form of legislative control over the licensing and operation of banks. 8.1.1 The Banking Ordinance 1948 Th e firs t bankin g legislatio n be came la w i n 1948 . The Bankin g Ordinanc e 1948 , was relativel y simple. It provided for: (a) th e licensing of banks, 279 280฀Law ฀Relating฀to฀Banking฀in฀Hong฀Kong฀ (b) th e appointment of an advisory committee, (c) th e restriction of the business of banking to hcensed banks, and (d) th e publicatio n o f balanc e sheet s o f bank s an d som e othe r relatively unimportant requirements. Despite the simphcity of this legislation, the very procedures of Ucensing did weed out many undesirable banking institutions. Calm and serenity again returned to the financial circle of Hong Kong and lasted until the summer of 1961 , when there was a run on the Liu Chong Hing Bank. The Hong Kong and Shanghai Bank and the Standard Chartered Ban k lent their suppor t an d this crisis wa s quickly resolved but the government was put on alert. It reahzed that the 1948 ordinance was inadequate to protect the public. Mr H. J. Tomkins of the Bank of England was appointed to conduct a study of banking operations in Hong Kong and submitted his report in 1963. 8.1.2 The Banking Ordinance 1964 I n 1964, a new set of banking rules, largely based on Tomkins' recommendations , was made law. The Banking Ordinanc e 194 8 wa s repealed . Th e ne w legislation , th e Banking Ordinanc e 1964 , was more comprehensive tha n its predecessor . Beside s absorbing most of the provisions of the previou s ordinance, the new la w introduce d t o Hon g Kon g the concep t o f banking supervision. This was then a novel idea for banks in Hong Kong. The 1964 ordinance had the following salient features: (a) Th e appointment of a Commissioner of Banking to oversee the activities of banking. (b) Th e requirement of a minimum paid-up capital of HK$5 million for an incorporated bank, and an equal amount in reserve. (c) Th e maintenance of a minimum of 25% of a bank's asset s in specified Uquid assets. (d) Prohibitio n o f advance s agains t the securit y o f a bank's ow n . shares . (e) Limit s o n bank s lendin g t o intereste d partie s suc h a s thei r directors and employees. (f) Restrictin g a bank from holding excessive interests...