Regulatory Framework

Supervisory Objective

The Banking Ordinance provides the legal framework for banking supervision in Hong Kong. As provided in section 7(1) of the Ordinance, the principal function of the Monetary Authority is to "promote the general stability and effective working of the banking system."

The HKMA monitors closely the continuing development of banking practices, market environment as well as international regulatory standards and considers in consultation with the banking industry whether any change to the Banking Ordinance is necessary.  The Banking (Amendment) Ordinance 2005 (BAO 2005) establishes a legislative framework for implementing the revised capital adequacy framework released by the Basel Committee on Banking Supervision ("Basel Committee") in Hong Kong.

Compliance with Basel Core Principles

The HKMA seeks to establish a regulatory framework which is in line with international standards, in particular those recommended by the Basel Committee. The objective is to devise a prudential supervisory system to help preserve the general stability and effective working of the banking system, while at the same time providing sufficient flexibility for authorized institutions to take commercial decisions.

Assessments against the Basel Committee's Core Principles for Effective Banking Supervision ("Core Principles") indicate that Hong Kong’s supervisory framework substantially complies with the Core Principles.  In October 2006, the Basel Committee released an updated version of the Core Principles incorporating revisions in the light of latest banking practices, supervisory issues and experiences on the implementation of the Core Principles.  The HKMA is currently undertaking a self-assessment focusing on these revisions.

Regulatory Requirements

Authorized institutions have to comply with the provisions of the Banking Ordinance which, among other things, require them to maintain adequate liquidity and capital adequacy, to submit periodic returns to the HKMA on the required financial information, to adhere to limitations on loans to any one customer or to directors and employees, and to seek approval for the appointment of directors and chief executives, and for controllers.  Overseas banks which operate in branch form are not required to hold capital in Hong Kong and are thus not subject to capital ratio requirements or to capital-based limits on large exposures.