Financial Disclosure by Overseas Incorporated Authorized Institutions
Introduction
| 1. |
This paper sets out the minimum standards
recommended by the Hong Kong Monetary Authority ("HKMA")
for financial disclosure by overseas incorporated authorized institutions. |
Background
| 2. |
Since 1994 the HKMA has, in conjunction
with the banking industry, other financial regulators and the accounting
profession, made significant efforts to improve the standard of
financial disclosure by authorized institutions incorporated in
Hong Kong. The results of this work are embodied in the "Best
Practice Guide on Financial Disclosure by Authorized Institutions"
(the "BPG") which was first introduced in 1994. In each
of the subsequent years, the BPG has been expanded to keep up with
developments in other financial centres and as a result the standard
of financial disclosure by locally incorporated institutions is
now comparable with other major international financial centres.
The increase in transparency of the operations of banks has also
been widely acknowledged as a contributing factor to the continuing
stability of the banking sector.
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| 3. |
However, this level of transparency has
not been extended to overseas incorporated institutions operating
in Hong Kong. This stems from the fact that the requirement to prepare
accounts under the Companies Ordinance only applies to locally incorporated
companies. Therefore overseas incorporated institutions operating
in branch form are not required to produce accounts for their local
operations in the same way as their locally incorporated counterparts.
The operating results and financial position of their Hong Kong
operations are reported only to their head office with any financial
information published subsequently only on an aggregate basis. This
is generally the case even for institutions which have a substantial
retail and commercial presence in Hong Kong. The lack of information
concerning the operation of these institutions is at odds with the
significant market share they hold in Hong Kong and represents a
significant gap in transparency of the domestic banking sector as
a whole. To illustrate their presence in the local market, as at
the end of 1997, foreign banks accounted for 56% of total loans
for use in Hong Kong and 28% of total customer deposits. This situation
means that a substantial portion of the information about the local
banking sector is missing and that market discipline is less effective
in helping to govern risk taking by these banks. This also gives
rise to issues regarding level playing field vis-a-vis their locally
incorporated competitors when they are all competing in the same
market and for the same customers, that is, foreign banks have more
information about their local competitors than vice versa regarding
their local operations.
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| 4. |
At the same time, it is well recognised
that financial information at the branch level, which only refers
to operations at a particular location, cannot contain all the relevant
information for a proper assessment to be made on the financial
position of the bank as a whole. Quite often, the operations of
a local branch are supported by the head office through funding
arrangements and other operational assistance. Therefore disclosure
of financial information at only the branch level may not provide
a fair view of the institution as a whole. However, this is considered
to be an issue in determining the type of information that should
be disclosed rather than a reason for deviating from the principle
of transparency.
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| 5. |
The HKMA is also aware that a similar
conclusion is being drawn by the consultants undertaking the strategic
review of the Hong Kong banking sector. This provides additional
support for the HKMA's case to increase the level of disclosure
by foreign banks in Hong Kong.
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| 6. |
In view of the above, the HKMA expects
institutions incorporated outside Hong Kong (except those which
meet the exemption criteria in para. 15 below) to disclose on a
half-yearly basis (i.e. for the first six months of each
financial year and for the whole of the financial year at year end)
selected financial information concerning their operations in Hong
Kong. As mentioned above, the disclosure of financial information
at the branch level may not result in a fair representation of the
financial position of the institution as whole. Therefore, overseas
incorporated authorized institutions should also disclose certain
information concerning the financial strength of the institution
as a whole on a consolidated basis in order to place the branch
operations in Hong Kong into proper perspective. This would allow
users of such information to better judge the financial strength
of the institution both in the local context and in totality. Details
of the disclosure requirements are set out below. |
Key financial information to be disclosed
| 7. |
The disclosure items are set out in Annex
1 the Key Financial Information Disclosure Statement
("Disclosure Statement") which contains two main sections.
The first section of the Disclosure Statement ("Branch Information")
deals with financial information concerning the operations of the
local branch. This includes key on- and off-balance sheet items
drawn from the BPG, which aim to give an impression of the size
and nature of an overseas incorporated institution's operation in
Hong Kong and the quality of its assets. Therefore, the information
disclosed in this section should cover the position of the Hong
Kong offices only. The BPG was used as a basis for determining the
information to be disclosed by the branch as it would provide comparability
between local and overseas incorporated institutions operating in
Hong Kong. Profit and loss information has not been included because,
in the majority of cases, institutions operating in branch form
are often subject to specific funding and provisioning requirements
determined by their head office. Such requirements differ between
institutions and therefore any information disclosed in this respect
may be difficult to compare. This portion will however be kept under
review.
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| 8. |
The second section of the Disclosure
Statement ("Bank Information") deals with disclosures
concerning the financial strength of the institution as a whole
on a consolidated basis and such information helps place the operations
of the branch within the overall context of the whole institution.
Such information would include capital and capital adequacy, total
assets, profitability, etc. This type of information is generally
accepted and used by the market participants as indicators of the
financial strength of an institution.
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| 9. |
It should be noted that the disclosure
requirements in respect of branch information include a breakdown
of overdue advances by the length of time overdue and the aggregate
amount of rescheduled advances. For the latter, these refer to loans
that have been restructured or renegotiated because of a deterioration
in the financial position of the borrower or of the inability of
the borrower to meet the original payment schedule. Disclosure of
overdue and rescheduled loans will be optional for the first year.
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| 10. |
Such information is already being collected
by institutions in their reporting to the HKMA and thus should not
represent a significant additional reporting burden. These proposals
are in line with a specific recommendation of the IMF in connection
with its 1997 Article IV consultation exercise in Hong Kong that
more information should be provided about banks' problem loans.
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| 11. |
In line with the requirements for locally
incorporated institutions, overseas incorporated institutions should
also disclose specific information about the Year 2000 problem.
This includes information on progress on Year 2000 compliance in
the context of both the local branch and the institution as a whole.
The type of information required is similar to that applicable to
listed companies in Hong Kong. |
Implementation issues
Effective date
| 12. |
The requirements will apply to relevant
authorized institutions incorporated outside Hong Kong (see paragraph
15) in two parts :
- First part - in respect of their Disclosure Statements for
financial or interim financial periods ending on or after 31
December 1998, all disclosure other than overdue loans and related
information i.e. Annex
1, Section A, items II (vi) and (vii);
- Second part - disclosures on overdue loans and related information
i.e. Annex
1 , Section A, items II (vi) and (vii) will be
optional for the first year. The HKMA intends that, after review
of the initial round of disclosure, all relevant institutions
should make these disclosures in the Disclosure Statements for
financial periods ending on or after 31 December 1999.
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Release, display and availability of Key Financial Information
Disclosure Statement
| 13. |
In order to reduce the cost burden on
institutions, it is not suggested that institutions should publish
their Disclosure Statements in newspapers (although they may do
so if they choose). Instead, these statements should be issued in
the form of a press notice containing the relevant Disclosure Statement
in both English and Chinese to newspapers circulating in Hong Kong
within three months from the end of each financial period. A copy
of the statement should also be displayed in a conspicuous position
in the principal place of business of the institution in Hong Kong
and in each local branch if applicable. The statement should also
be made readily available to members of the public on request. Institutions
should lodge a copy of the press notice with the HKMA one week prior
to release. The HKMA will keep such notices in its public registry
maintained under section 20 of the Banking Ordinance.
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| 14. |
The HKMA is also proposing legislative
changes to the Banking Ordinance early next year to remove the requirement
for local banks to publish their annual accounts in the newspapers.
If this is achieved, a similar requirement to the above would be
introduced for local banks to ensure consistent treatment. |
Exemptions
| 15. |
The recommendations apply to all overseas
incorporated institutions whose Hong Kong offices currently have
total assets of HK$10 billion or more or total customer deposits
of HK$2 billion or more.
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| 16. |
Consistent with existing practice, the
HKMA will use the figures which institutions report on item 25 (Total
assets less provisions) and item 6.4 (Total deposits from customers)
of the Return of Assets and Liabilities of an Authorized Institution
(Form MA(BS)I) to determine whether an institution meets the above
size criteria. The average of the relevant figures reported in the
twelve month period up to end-August will be adopted in order to
avoid the effects of one-off fluctuations at the end of the period. |
Audit and certification of disclosures
| 17. |
Institutions will not be required to
have their Disclosure Statements audited. However, they should include
a statement by the Chief Executive of the institution that the disclosure
complies with the HKMA's recommendations and is not false or misleading.
In cases of partial compliance, the statement of the Chief Executive
should specify the areas of, and reasons for, non-compliance. |
Compliance
| 18. |
The HKMA expects all overseas incorporated
institutions other than those which meet the exemption criteria
to comply with these recommendations. It will also consider whether
the Banking Ordinance should be amended to include adequate disclosure
of financial information as a criterion for authorization for all
authorized institutions irrespective of whether they are incorporated
in or outside Hong Kong.
Updated on 1 Dec 1998
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