Question 1a Hong Kong maintains a three-tier system of deposit-taking institutions, namely, licensed banks, restricted licence banks, deposit-taking

companies. They are collectively known as authorized institutions under the banking ordinance. The key features of this system as follows: Licensed banks In Hong Kong, only licensed banks may operate current and savings accounts, and accept deposits of any size and maturity from the public and pay or collect cheques drawn by or paid in by customers Restricted License Banks (RLBs) Restricted license banks are principally engaged in merchant banking and capital market activities. They may take deposits of any maturity of HK$500,000 and above. Those banks are involved lower regulatory burden with lower licensing fees and lower minimum paid-up capital requirements Deposit Taking Companies (DTCs) Deposit-taking companies are mostly owned by, or otherwise associated with, banks. These companies engage in a range of specialised activities, including consumer finance and securities business. They may take deposits of HK$100,000 or above with an original term of maturity of at least three months. Those bank are involved lowest regulatory burden. Question 1b
Although there are no reserve requirements for banks in Hong Kong, the Banking Ordinance specifies a clearly defined statutory liquidity ratio for authorized institutions. It means that Hong Kong could not create money indefinitely. Banks need to hold short-term funds is to fulfil the liquidity ratio requirement imposed on them. The Hong Kong Banking Ordinance, which was intended to raise public confidence in banks ability to pay on demand, requires banks to maintain a liquidity ratio above 25%. Cash and balances held at other banks are the most liquid assets and therefore are counted in the liquidity ratio. Other easily liquefiable assets, such as negotiable certificate of deposits (NCDs) are also counted. Keep in mind, however, that a liquidity ratio requirement is not the same as a reserve requirement. However, it has the same multiplying effect in money creation as the required reserve does. In additional, the power of banks to create money can be limited by, for example, banks own prudent financial management, which forces them to keep adequate amounts of cash and

liquid assets on order to maintain the confidence of depositors. The bank will keep fractional reserves. On the other hand, in order to settle everyday transactions on behalf of their customers, banks also have to keep a certain amount of cash on hand or in the form of short-term deposits in other banks. In addition, as a prudential practice, banks have to keep extra money ready for sudden withdrawals from their depositors.