One-branch-only rule can be bypassed with virtual banking

The provision of banking services via the Internet will enable foreign banks which set up in Hong Kong after 1978 to bypass the one-branch-only restriction and expand their retail banking presence here, the Hong Kong Monetary Authority says.

The authority's head of banking development, Edmond Lau, said no legislation had yet been established specifically to regulate Internet banking around the world.

As most regulators were still taking a 'wait and see' attitude on further developments of Internet banking, the authority saw no immediate need to introduce legislative changes to regulate these activities in Hong Kong, he said.

The one-branch-only policy was introduced in 1978 in an attempt to avoid excessive competition at a time when Hong Kong's banking industry was still in an infant stage.

The authority is understood to be considering the possibility of scrapping the restriction.

In a parallel development, it has formed a study group comprising representatives from the banking industry and relevant experts and professionals, to look into regulatory issues in technological development.

The group would advise on ways infrastructure for electronic banking could be improved and the policy and regulatory framework which could provide a sound and secure basis for development in this area.

Mr Lau said before any concrete proposals came out, the authority would require all Internet banks providing services to Hong Kong consumers be legal entities.

By requiring internet banks to have a legal existence, the authority can regulate them as an ordinary 'physical bank', subject to the same set of risk management requirements.

They also should have their own balance sheets and hold capital against risks in those balance sheets.

'Risks need to be managed in the same way irrespective of whether it is a 'virtual' or 'physical' bank,' Mr Lau said.

The internet's 'no boundary' nature implies banks not authorised in Hong Kong will still be able to provide services here by electronic means.

Mr Lau said the authority would try to increase co-operation with overseas regulators, especially the Basle Committee, to develop and understand the expertise required to properly supervise these activities.

The authority also would discuss with Hong Kong banks planning to launch internet services to ensure that all relevant risks are properly addressed, he said.