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HK Fully Deregulates Interest Rates
Hong Kong's interest rate rule (IRR) system, which has been phased out since 1994, was totally terminated Tuesday as the limit on current and savings accounts was all lifted.
Hong Kong's banking industry will enter a completely new era and this will produce profound impact on banks, depositors and investors, according to analysts.
It does not suit Hong Kong's status as an international financial center to maintain the interest rate cartel, they said.
The banking industry of the United States and Europe began to eliminate the IRR system in the 1980s.
"The banking industry in Hong Kong is experiencing fundamental changes for a number of reasons, of which one is interest rate deregulation," said Raymond Or, general manager of HSBC, Hong Kong 's largest bank.
"The removal of the maximum rate caps on deposits will increase competition and threaten to tighten margins further," Or said.
Joseph Yam, chief executive of the Hong Kong Monetary Authority, said that the deregulation of IRR system will spark tougher competition in Hong Kong's banking industry and make the consolidation of medium and small banks an inevitable trend.
The competition will force banks to improve their management and make both banks and customers make their new choices.
Many banks in Hong Kong have worked out new interest rate and charging plan in response to the deregulation of IRR.
The Hong Kong and Shanghai Banking Corporation Limited (HSBC) announced in April a plan which means customers whose savings account balances fall below 5,000 HK dollars (641 U.S. dollars) will be charged a monthly fee of 40 HK dollars (5 U.S. dollars) as from July 1 and those whose deposits fall below 1,000 HK dollars ( 128 U.S. dollars) will enjoy no interest as from May 1.
HSBC began paying only 1.75 percent on basic savings' accounts from Tuesday.
That set a new industry low at 50 basis points below the last rate set under the old IRR system and takes the savings' rate to its lowest level in almost 20 years.
The prime lending rate of HSBC dropped by 25 basis points as from Tuesday to 6.75 percent, also near a 20-year low in nominal terms.
Hang Seng Bank, HSBC's subsidiary bank, will offer the same rates.
Standard Chartered Bank, Bank of East Asia and Bank of China have announced that they would cut their old savings rates by a more modest 25 basis points to 2 percent, and best lending rates by the same margin to 6.75 percent.
Among smaller banks, International Bank of Asia, Hong Kong Chinese Bank, Liu Chong Hing Bank, Wing Lung Bank and First Pacific Bank have said they would pay a basic savings rate of 2 percent, a quarter of a percentage point below the old savings rates.
It is hard for the customers to make comparisons between the banks as most of them introduced tiered structures, which offer varying bonus rates that will be added to the basic rate depending on the size of account balances or the number of banking products used by the customers.
The IRR system was introduced in July 1964 in response to a bidding war for deposits that triggered a collapse of several banks and a crisis of confidence in the banking sector.
According to a report published by KPMG, the removal of IRR could result in an interest rate margin as high as 49 basis points in Hong Kong.
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