Evolve or perish? Death knell for Hong Kong’s deposit-taking companies as reform deepens

The decision by the Hong Kong Monetary Authority (HKMA)’s earlier this month to reduce the three-tier banking system to two, by killing off DTCs, is a “natural market evolution” since it scrapped the local interest-rate cartel/regime in 2001, some former bankers said.

“The three-tier banking structure and the popularity of DTCS are very much related to the interest rate rules started in the early 1980s,” said Wilson Chan Fung-cheung, associate director of MBA programme at City University. “After the rules were scrapped in 2001, demand for DTC services declined.”

DTCs have progressively faded from the scene over the past two decades, “so forcing them to either upgrade or exit will not have a big impact on the local banking sector,” added Chan, who spent 30 years as a banker before joining the university.

The current three-tier system comprises 149 licensed banks, 16 restricted licence banks otherwise known as investment banks, and 12 DTCs. Under the HKMA’s reform – the biggest in four decades – the DTCs will need to boost their capital to join the second tier within five years, or voluntarily exit the industry.

The interest-rate guidelines were introduced by the government in the early 1980s under a banking ordinance to prevent lenders from engaging in a race to the bottom to win customers. The law empowered the HKAB to set deposit and lending rates at weekly meetings.

Under rules set by the HKAB, all licensed banks strictly followed the same rates for time deposits, saving deposits as well as various loan products, creating a cartel within the industry.