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Hong Kong Tier 3 banks are asked to either upgrade or exit
Ken Shih
Saxo’s Head of Wealth Management Greater China
Summary: The Hong Kong Monetary Authority (HKMA) recently announced proposals to modernize its 3-tier banking system: Tier 3 deposit taking companies are asked to increase their capital requirements and upgrade themselves to either of the 2 higher tiers within the next 5 years or exit the market.
In its first banking reform in 4 decades the Hong Kong Monetary Authority (HKMA) recently announced proposals to modernize its 3-tier banking system:
Tier 1: Licensed Banks (99% of consumer deposits)
Tier 2: Restricted License Banks (0.9% of consumer deposits)
Tier 3: Deposit Taking Companies (0.1% of consumer deposits)
Tier 3 deposit taking companies are asked by the HKMA to increase their capital requirements and upgrade themselves to either of the 2 higher tiers within the next 5 years or exit the market.
1️. What does this change mean for banks operating in Hong Kong?
This move should be viewed more as a move to simplify the banking structure in Hong Kong. Mainly because it impacts less than 12 smaller tier 3 players called Deposit Taking Companies (DTCs) holding less than 0.1% of total customer deposits in Hong Kong. For banks in Hong Kong this initiative will likely result in some natural attrition with some DTC players exiting the market.
From a more positive standpoint, this will improve flexibility and potential profitability with the current DTCs since they will no longer need to hold deposits for at least 3 months and can offer a wider range of banking services thereby improving their revenue prospects.
2️. Is the move part of HKMA's attempt to ensure stability and strengthen Hong Kong's banking sector amid the global banking turmoil?
Given the banking turmoil we saw amongst smaller US regional banks in early March, there may be some such implication behind this initiative in strengthening the smaller Deposit Taking Companies (DTCs) in Hong Kong's banking system.
BUT it is important to point out this may not be an apt comparison given the difference in market dynamics for Hong Kong's banking system and the limited range of banking services offered by the DTCs in question.
For example, from a deposit exposure standpoint in the US, smaller regional banks (between US$10-100 billion assets) and community banks (under HK$10 billion assets) hold 28.3% of all US customer deposits at end of 2022 according to the Federal Reserve.
That is a stark difference to deposit exposure DTC players (less than 0.1%) have in Hong Kong.
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