For example, the ability to transfer funds between different bank accounts may increase deposit volatility and could, in extreme situations, lead to “virtual bank runs”. Banks will need to build this possibility into their liquidity management policies. Similarly, it is possible that credit risks could increase in the future if the relationship with customers becomes more distant and more transitory, and if the banks relax credit standards because of competitive pressures. On the other hand, banks will be better placed to obtain and organise information about their customers in an electronic banking environment, and this could help to improve credit evaluation techniques as well as to assist marketing. It all depends how much information each bank has about a given customer. If the customer spreads his financial affairs across a large number of internet-based banks, each one will have only one piece of the overall customer profile. Regulatory Framework So how do we regulators address these various kinds of risk? The first point to make is that our approach to the regulation and supervision of e-banking is still at an early stage, like the product itself, and is still evolving. We recognise that we have a lot of work to do in keeping abreast of, and monitoring, developments. This is part of our general approach of trying to improve our ability to determine that banks have in place adequate systems to measure, identify and control the various types of risk with which they are faced.
Parentage would also be important – it would be highly desirable from our point of view that an internet bank was itself majority-owned by another well-established bank that could provide guidance and financial support if necessary. In general, we would need to be assured that the virtual bank has “substance”, and is not simply a “concept”, taking advantage of the popularity of the internet. On this basis, our authorisation and supervisory regime for virtual banks would be similar to that for conventional banks. However, an offshore internet bank, whether wholly “virtual” or not, might not attempt to take deposits in Hong Kong in the strict legal sense – in other words, the deposit contract might not necessarily be created in Hong Kong. Instead, the offshore internet bank might invite potential customers to send their money to a location abroad, where the deposit would be legally created. In this case, the bank would be taking deposits outside Hong Kong and would not require authorisation under the Banking Ordinance to carry on a deposit-taking business here. But that is not the end of the story. It is also an offence to advertise for deposits in Hong Kong, even if they are to be taken outside the territory, unless the disclosure requirements of the Fifth Schedule of the Banking Ordinance are adhered to. An advertisement would include one contained on a website. The problem is how to determine whether a particular offshore website is targeted at Hong Kong.