8 Cooperation in the Banking Sector
- International Monetary Fund
- Published Date:
- June 2007
1.1. This chapter discusses the practices in Hong Kong Special Administrative Region (SAR), in terms of cross-border cooperation and information sharing with other banking supervisors. It also covers the arrangements for sharing information with the other financial regulators in Hong Kong SAR.
2. Importance of Supervisory Cooperation and Information Exchange
Globalization of Banks
2.1. The banking industry in Hong Kong SAR is now highly internationalized. For instance, 111 out of 135 banks are foreign banks. In addition, several major retail banks are owned by international banking groups. Many local banks have also established overseas branches or subsidiaries. To help ensure the safety and soundness of international banking groups and banks with overseas establishments, banking supervisors need to cooperate effectively with other supervisors on a cross-border basis.
2.2. The increasing trend of cross-border fraud cases, such as money laundering, terrorist financing, and e-banking fraud, also calls for cross-border supervisory cooperation and information sharing among financial authorities.
2.3. The Basel Committee on Banking Supervision has established a set of international minimum standards for the supervision of international banking groups and their cross-border establishments. The standards essentially require that the home supervisor of an international bank exercise consolidated supervision of the bank as a whole, whereas the host supervisor is responsible for the supervision of the bank’s branch in that jurisdiction.
2.4. There has been an emergence of financial groups that provide a range of financial services, such as banking, securities, and insurance. For example, earlier research suggested that around one-third of European bank deposits belonged to financial conglomerates. Banks in Hong Kong SAR have also been diversifying their income sources into securities brokerage, wealth management, and insurance through their branch networks or subsidiaries. In order to exercise effective consolidated supervision, there is a need for banking supervisors to strengthen their cooperation with regulators of the securities and insurance sectors to help ensure the safety and soundness of the banks concerned.
2.5. The Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors have jointly issued a number of papers on the principles regarding the supervision of financial conglomerates. These principles highlight, among other things, the importance of information sharing among financial supervisors of different industries and the need for identifying a primary supervisor of a financial conglomerate, having regard to its structure and principal activities.
2.6. Although each supervisor needs to perform its statutory responsibility, coordination is necessary to ensure that supervisory information is shared promptly among the authorities and that supervision is coordinated to avoid overlaps or gaps.
3. Experiences with Cross-Border Cooperation and Information Exchange
Mechanism in Place in Hong Kong SAR
3.1. In order for the authorities to have the power to share information, there must be explicit provisions in the banking laws. The Banking Ordinance in Hong Kong SAR allows the Hong Kong Monetary Authority (HKMA) to disclose supervisory information to an overseas financial authority to facilitate the performance of the latter’s supervisory duties, provided that the authority concerned is subject to adequate secrecy provisions and the disclosure is not contrary to the interests of depositors or the public interest. The HKMA can also provide individual customers’ information to an overseas supervisory authority if it is satisfied that this will help the overseas authority to perform its duties. Such disclosure, however, will be made only on a “need-to-know” basis. In disclosing information to another supervisory authority, the HKMA will normally require the recipient authority not to disclose the information to any third party without the prior consent of the HKMA. Where the recipient authority is compelled by laws to disclose the information received from the HKMA to a third party, the HKMA’s usual practice is to not unreasonably withhold consent for the recipient authority to reveal the information.
3.2. The HKMA has signed memoranda of understanding (MoUs), or exchanged letters of cooperation, with the financial authorities of 10 jurisdictions.1 In determining whether to enter into an MoU with an overseas financial authority, the HKMA would generally consider the extent of the relationship between the Hong Kong SAR banking sector and the banking sector of the jurisdiction concerned, and the adequacy of the counterpart’s secrecy provisions. Even without entering into an MoU, the HKMA may also share supervisory information with overseas financial authorities, provided that there is a need to do so and the recipient authorities are subject to adequate secrecy provisions in their own jurisdictions. The existence of an MoU helps to clearly specify the type of information to be shared and the need to maintain secrecy.
3.3. The HKMA may exchange supervisory information with overseas financial authorities in writing or through regular bilateral meetings. In many cases, we found other channels, such as telephone discussions, e-mails, or ad hoc meetings with overseas authorities, useful, since such channels allow the parties involved to promptly clarify and exchange information on issues of common interest.
An Example of Bilateral Cross-Border Cooperation
3.4. The HKMA was notified by an overseas financial authority of a potential fraud case involving staff of the Hong Kong SAR branch of a foreign bank. As a result of the information, the HKMA carried out an assessment on the adequacy of the relevant controls of the Hong Kong branch, and the fitness and propriety of the staff concerned. The HKMA also discussed the case with the home regulator of the foreign bank concerned to facilitate the home regulator’s supervision of the bank as a whole. The information sharing helped the HKMA to understand the nature of the case and the weaknesses in the internal controls of the Hong Kong branch concerned.
4. Experiences with Cross-Sectoral Cooperation and Information Exchang
Overview of Cooperation with Local Financial Authorities
4.1. The Banking Ordinance in Hong Kong SAR allows the HKMA to share supervisory information with the other three local financial authorities—the Securities and Futures Commission (SFC), the Insurance Authority (IA), and the Mandatory Provident Fund Schemes Authority (MPFA)—and other local agencies, such as the police, under certain conditions. As mentioned before, banks are allowed to offer financial services on securities, insurance, and provident funds through their branch networks or subsidiaries. The HKMA, the SFC, the IA, and the MPFA need to exchange and share information to help ensure the safety and soundness, and proper conduct of the banks concerned. To this end, the HKMA has signed MoUs with the SFC, the IA, and the MPFA to strengthen cooperation on supervision of entities or financial groups in which both parties have a mutual interest. Regular meetings are held with these authorities to exchange information.
4.2. These arrangements are important, since the problem of a financial conglomerate that has emerged in one financial sector might have a spillover effect on other sectors of the same group. Any significant problems of a major financial conglomerate would affect not only the conglomerate but also the stability of the financial sector or even that of the entire financial system. Regarding the supervision of complex financial conglomerates, a lead supervisor needs to be appointed to coordinate supervisory efforts so as to ensure information is shared promptly among regulators. Generally speaking, the supervisor responsible for supervising the core business of the financial conglomerate would be selected as the lead supervisor of the group.
Cooperation with SFC
4.3. In Hong Kong SAR, the HKMA is the front-line regulator of the securities business of banks. In this connection, the HKMA has been cooperating with the SFC to ensure that the same supervisory standards applicable to securities firms will be applied by the HKMA to banks’ securities business. In particular, the HKMA has sought the SFC’s clarification of the relevant regulatory guidelines and standards for securities business, and exchanged information with the SFC whenever there has been a need to do so.
5.1. With the globalization of banks and emergence of financial conglomerates that operate in different financial sectors, information sharing and cooperation with other domestic and overseas supervisors have become increasingly important to banking supervisors. On the one hand, each supervisory authority should review whether there are any hindrances, in its legislation, to information sharing with overseas supervisors as well as with other local supervisors, and should take appropriate actions to remove such hindrances. On the other hand, supervisory authorities should also review whether adequate secrecy provisions are in place in their legislation to give assurances to authorities providing information that such information would not be passed to another party without the latter authorities’ prior consent.
Canada, China, Denmark, France, Germany, Indonesia, Macao Special Administrative Region (SAR), the Netherlands, the United Kingdom, and the United States.