Hong Kong's de facto Central Bank has announced plans to encourage more foreign banks to set up branches in the SAR, slashing the value of their required assets by more than 95 per cent. The Hong Kong Monetary Authority's move follows a 33 per cent decline in the number of authorised institutions setting up in Hong Kong in the past six years. Bankers said the plan was to ensure overseas financial institutions used Hong Kong as a hub to enter the China market rather than heading directly into the mainland. The proposal, unveiled in a consultation paper yesterday, would remove the US$16 billion minimum asset requirement for foreign banks. Some of the changes would be implemented under the current powers of the HKMA, while some would need a change in the law. The proposed rule would require foreign banks to only have HK$5 billion in assets, the same as for SAR incorporated banks. The benchmark for banks to set up in the mainland are much steeper, with a minimum requirement of US$20 billion. However, Government sources said the move was also aimed at encouraging the mainland to drop its requirement level to make it easier for foreign banks - including those in Hong Kong - to set up there. The HKMA has added a new rule to foreign applicants, saying they must have HK$4 billion worth of customer deposits, again to bring them into line with locally incorporated banks. 'These proposals would further open up Hong Kong's banking sector to allow a broader range of domestic and international institutions to participate in the Hong Kong financial markets as full-licence banks,' said David Carse, HKMA deputy chief executive. 'We believe these incentives will help to rationalise the authorisation and market entry system in Hong Kong and will also enhance the status of Hong Kong as an international financial centre.' The HKMA proposed no immediate changes to the current three-tier system but said it would first monitor the implementation of the asset requirement proposals. The current system divides authorised institutions into three classes - fully licensed banks, restricted licence banks and deposit-taking companies. The three have different criteria and cater for different classes of business, with fully licensed banks having the highest requirements and able to do the most banking business. Under the proposal, the HKMA also would relax the criteria for restricted licence banks and deposit-taking companies to upgrade to full licensed banks. These include reducing the period for their operations from 10 years to three years before they can apply for an upgrade. In a bid to allay fears the relaxation will lead to too many small banks flooding into Hong Kong, it also suggested increasing the minimum paid-up capital requirement for licensed banks from HK$150 million to HK$300 million. The HKMA said the revamp would be needed as the requirement had become outdated. For example, the high assets entry requirement was aimed at limiting the number of foreign banks in Hong Kong to avoid over-banking. The rule came after a large number of banks entered the local banking sector in mid 1970s. But the number of banks has dropped 33 per cent from 380 in 1995 to 252 now. 'This is partly due to the withdrawal of foreign banks, in particular Japanese and European banks, after the Asian financial crisis and partly due to the ongoing trend of consolidation which is certain to continue,' the HKMA said. The drop was due mainly to the departure of overseas banks. Hong Kong has only 119 overseas-incorporated banks, down 22 per cent from 154 in 1995. There are now 31 locally incorporated banks, compared with 30 in 1995.