1. The business environment for Hong Kong banking industry Hong Kong, both as a local banking market with a large representation of global players and as an international financial center, is subject to changes and developments in the global financial market. It is essential to understand the forces driving change in banking industry. Hong Kong, both as a local banking market with a large representation of global players and as an international financial center, is subject to changes and developments in the global financial market. It is essential to understand the forces driving change in banking industry.

2. The business environment for Hong Kong banking industry The global economy Economic growth and development over the past two decades has been a key driver of the development of financial services. Increasing cross-border capital flows and exponential growth in international trade all affecting banking industry. In the future, it is likely that the growth in Asia especially China will lead the global economic growth. Economic growth and development over the past two decades has been a key driver of the development of financial services. Increasing cross-border capital flows and exponential growth in international trade all affecting banking industry. In the future, it is likely that the growth in Asia especially China will lead the global economic growth.

3. The business environment for Hong Kong banking industry Change in regulation Deregulation of financial, capital and trade markets has facilitated the development of the global financial markets. Reductions in regulatory barriers have opened banking markets to foreign competition. It is expected that liberalization will continue in the future. Deregulation of financial, capital and trade markets has facilitated the development of the global financial markets. Reductions in regulatory barriers have opened banking markets to foreign competition. It is expected that liberalization will continue in the future.

4. The business environment for Hong Kong banking industry Technological innovation and the development of new skills Developments in technology (lower costs, more powerful software, broader and wider access to communications and advances in databases) enable change in all areas of banking and financial management including: The development of new products; The development of new products; Improvements in efficiency of operations; Improvements in efficiency of operations; Electronic distribution and delivery of products; Electronic distribution and delivery of products; Improvements in risk management Improvements in risk management

5. The business environment for Hong Kong banking industry Customer needs and demographic changes Customer needs are one of the major forces driving change in financial markets. The key developments influencing customer needs are population growth and aging, increasing education levels, changing work patterns and increasing consumer wealth. As a result, Hong Kong consumers now rely more on the financial sector and have greater exposure to banks in general (e.g. though the provision of investment and deposit services).

6. The business environment for Hong Kong banking industry Changes in demographics and in consumer needs have and will continue to cause fundamental shifts the way in which consumers interact with banks: Product and services preferences Product and services preferences Distribution channel preferences Distribution channel preferences Brand/supplier relationships Brand/supplier relationships

7. The business environment for Hong Kong banking industry Financial markets developments Explosive growth in global financial markets, the development of new complex financial products and increasing linkages between countries are forces which are driving fundamental changes in how companies raise capital and manager their risk. Additionally, these forces are also driving the investment vehicles consumers have access to and demand, and are reshaping the traditional role that banks play as intermediaries. Explosive growth in global financial markets, the development of new complex financial products and increasing linkages between countries are forces which are driving fundamental changes in how companies raise capital and manager their risk. Additionally, these forces are also driving the investment vehicles consumers have access to and demand, and are reshaping the traditional role that banks play as intermediaries.

8. Changes in the organization structure of a Commercial Bank Rapid expansion in the number and variety of financial products and services Banks provide and offer wider number and variety of financial products and services to the public to compensate the decrease in net interest income. Banks provide and offer wider number and variety of financial products and services to the public to compensate the decrease in net interest income. Establishment of Insurance and Investment Services Division to provide diversified products and services Establishment of Insurance and Investment Services Division to provide diversified products and services

9. Changes in the organization structure of a Commercial Bank Compete on information technologies basis Competitions are mainly on competence in information technology of bank. Competitions are mainly on competence in information technology of bank. More self-service machines and internet banking More self-service machines and internet banking Outsourcing of Information Technologies Outsourcing of Information Technologies

10. Changes in the organization structure of a Commercial Bank Compete with other banks in other countries Financial markets around the globe become more closely interconnected to each other. Financial markets around the globe become more closely interconnected to each other. China market becomes important China market becomes important Development of China market is affected by the pace of opening China banking industry Development of China market is affected by the pace of opening China banking industry

11. Changes in the organization structure of a Commercial Bank Deregulation to allow competition Interest rate deregulation Interest rate deregulation Removal of the three-building condition Removal of the three-building condition Relaxation of entry of foreign bank Relaxation of entry of foreign bank

12. Changes in the organization structure of a Commercial Bank Increased in complexity of risk management Risk management become more important as a result of diversified products and services provided. Risk management become more important as a result of diversified products and services provided. Enlarge the Risk Control Division Enlarge the Risk Control Division

13. Changes in the organization structure of a Commercial Bank More supervision from HKMA As the complexity of banking business increases, Hong Kong Monetary Authority has more supervision over the authorized institutions. As the complexity of banking business increases, Hong Kong Monetary Authority has more supervision over the authorized institutions. Setting up of Compliance Division Setting up of Compliance Division

14. Changes in the organization structure of a Commercial Bank Consolidation of financial institutions More mergers and acquisitions take place in the past few years to make smaller banks become large conglomerates More mergers and acquisitions take place in the past few years to make smaller banks become large conglomerates Many mergers and acquisitions take place since the past decade. Many mergers and acquisitions take place since the past decade. Consortium of banks appears in Hong Kong Consortium of banks appears in Hong Kong

15. The segregation of duties in a commercial bank Banking Operation Division Banking Operation Division gives support to the Risk Management & Marketing Division through the following back-up services : The Accounting Department is the planner and controller of the bank ’ s budgets, provides management information and keep track records of the financial status of the bank. The Accounting Department is the planner and controller of the bank ’ s budgets, provides management information and keep track records of the financial status of the bank. The Remittance Department deals with the process of transferring funds to and from customers ’ accounts, either instructed by the customers or by other banks. The Remittance Department deals with the process of transferring funds to and from customers ’ accounts, either instructed by the customers or by other banks.

16. The segregation of duties in a commercial bank The Deposits and Loans Departments handle all paper work and documentation related to customers ’ deposits and loans transactions. The Deposits and Loans Departments handle all paper work and documentation related to customers ’ deposits and loans transactions. The Foreign Exchange Department backs up the bank ’ s Treasury Division in the recording, position keeping and follow up on the purchases and sales of foreign exchange contracts. The Foreign Exchange Department backs up the bank ’ s Treasury Division in the recording, position keeping and follow up on the purchases and sales of foreign exchange contracts. The Bills Department handles customers ’ trade transactions with third parties and provides trade finance to earn both interest and commission income. The Bills Department handles customers ’ trade transactions with third parties and provides trade finance to earn both interest and commission income.

17. The segregation of duties in a commercial bank Treasury Division The Treasury Division buys funds to cover the bank ’ s exposure in lending and sell the surplus funds to earn interests. The funds can be Hong Kong currency and foreign currencies.

18. The segregation of duties in a commercial bank Administration Division The Administration Division looks after the bank ’ s premises, maintains supplies of stationery and equipment, and provides other services like printing, messengers, security, etc.

19. The segregation of duties in a commercial bank Human Resource Division The Human Resource Division is responsible for recruiting and allocating the bank ’ s manpower, administration of salary and fringe benefits, and staff training.

20. The segregation of duties in a commercial bank Marketing Division Marketing Division is the front line to contact, liaise, negotiate and serve the customers. It is responsible for retail marketing and wholesale marketing.

21. The segregation of duties in a commercial bank Marketing Division To ensure adequate fund supply, the retail marketing group has to innovate new products and provide better services, such as higher interest rates for larger amount deposits and tailor-made customer services. On the other hand, personal loans are offered to individuals which contribute some interest income to the bank.

22. The segregation of duties in a commercial bank Marketing Division The target customers of wholesale marketing group are composed of corporate customers with a constant need of bank financing. By making use of the funds absorbed by the retail marketing group, the wholesale marketing group earns interest income through successfully selling the products like letter of credit, bills collection, foreign exchange, overdraft, etc.

23. The segregation of duties in a commercial bank Marketing Division The operations of the wholesale marketing group start with the initiation of account relationship, setting up credit facilities, and credit review. Corporate customers may deposit their idle funds with their bankers to earn interest. The deposits are of large amount and short tenor.

24. The segregation of duties in a commercial bank Risk Management Division It performs the credit review and monitoring duties. It ensures the risk of the advances granted by the Credit and Marketing Division is of acceptable level. As a result, the credit risk will not be high and asset quality is good.

25. The segregation of duties in a commercial bank Internal Audit Division The Internal audit Division inspects the operations from checking of accounting records and counting cash in vaults to interviewing of staff to discuss management problems. It ensures that the bank is operating in accordance with the government ’ s regulations and management ’ s objectives and policies.

26. The segregation of duties in a commercial bank Investment Services Division Bank offers a full spectrum of investment products and services to both private and corporate investors. The funds cover different asset classes including global equities, bonds, money markets and foreign exchange markets. Banks also provide asset management services for retirement schemes, institutional investors and charitable organisations.

27. The segregation of duties in a commercial bank Investment Services Division With the professional knowledge and expertise in asset management, customer are interested in taking part in managing investment portfolios to enhance investment performance.

28. The segregation of duties in a commercial bank The Information and Technology Division In the past, it is mainly responsible for collecting all the source documents and posting them onto the bank ’ s accounting records on a daily basis.

29. The segregation of duties in a commercial bank The Information and Technology Division But now it deploys the latest technologies to meet changing customer needs and enhance bank ’ s leading edge. It develops customer-oriented systems to ensuring that customers can enjoy a sophisticated range of banking products in the most efficient and convenient way. Innovative e- banking services such as Internet Banking and other wireless financial services allow customers to manage their wealth with ease any time around the world.

30. The segregation of duties in a commercial bank The Information and Technology Division Designing and delivering the best solutions as well as maintaining the stability and security of different computer systems will be their critical mission. They also contribute to enhancing operational efficiency and increasing the productivity of the user departments.

31. The segregation of duties in a commercial bank The setting up of Compliance Division There are many laws and regulations governing the operation of banks. The Compliance Division ensures that the regulations set by the supervisory institution (e.g. HKMA and HKAB) have been adhered.

32. The segregation of duties in a commercial bank Setting up of subsidiary company for Insurance business It provides a wide range of general insurance services including fire, marine and accident insurance that we have learned in chapter 9.