LLAW6024 _JDOC6024_Banking law [Section 1A, 2024] [2024]
Banking law (LLM) (LLAW6024)
Andrew Fei
B.A. (Cantab), M.A. (Cantab), LL.M. (Harv.)
Semester 1, 2024: Thursdays, 6:30 p.m. to 9:30 p.m. (CPD-3)
Summary
Combining theory with practice, this course focuses on the laws, regulations and policies that affect the banking industry, as well as the key legal documents used in banking transactions.
Beginning with an introduction to the fundamental concepts of banks and their operations, we explore the evolution of global banking regulations, focusing on capital, liquidity and prudential requirements as well as resolution regimes for banks and other financial institutions.
Our journey then takes a closer look at Hong Kong’s legal and regulatory framework for banking and financial services, ensuring students are well-versed in both global and local banking laws and regulations.
Next, we delve into real-world banking transactions with an emphasis on legal documentation and drafting techniques. Through a detailed case study of syndicated loan agreements, students will gain hands-on experience in crafting and negotiating legal documents. This practical approach continues as we look at other topics such as security interests, guarantees and derivatives.
As the global banking landscape continues to evolve, we consider contemporary issues such as digital assets, central bank digital currencies (“CBDCs”), tokenisation as well as Environmental, Social and Governance (“ESG”) issues in the banking sector. In the wake of the 2023 banking turmoil, we also explore the role of bank deposits and deposit insurance in the financial system.
By the end of this course, students will not only understand the key legal and regulatory principles in the field of banking, but will also acquire practical skills in analysing, drafting and negotiating key agreements used in banking transactions. These analytical and practical skills are highly transferrable to other areas of law.
About the lecturer
This course is taught by Andrew Fei, a partner in the Banking and Finance department at King & Wood Mallesons in Hong Kong. Andrew has over a decade of experience in the areas of financial regulation, syndicated loans, structured finance, derivatives, fintech, digital assets, capital markets and securitisation. Andrew has advised many major financial institutions, corporates and fintech companies on a wide range of innovative structured finance transactions, cross-border derivatives transactions, close-out netting and collateral arrangements, syndicated financing transactions, Basel III regulatory capital instruments, securities financing transactions, financial regulatory matters as well as digital assets-related transactions and arrangements.
Andrew was named “Rising Star Partner” in Capital markets: Structured finance and securitisation by IFLR1000 in 2023 and “Leading Lawyer” in Capital Markets: Securitisation & Derivatives by Chambers Greater China Region Guide in 2024. Andrew has been quoted as an expert on various banking and finance matters in the international press, and frequently speaks and writes on these topics.
Course Overview
Aims and Objectives
The overall aim of this course is to provide students with a solid understanding of the laws, regulations and policies that affect the banking industry, as well as the key legal documents used in banking transactions.
The key objectives of the course are as follows:
1. Comprehensive Understanding: To provide students with a comprehensive understanding of banking law and practice, covering both theoretical concepts and practical applications.
2. Regulatory Knowledge: To equip students with a deep understanding of evolving global banking laws, policies and regulations, with a particular focus on capital, liquidity, and prudential requirements.
3. Legal Skills Development: To enhance students' practical legal skills, particularly in analysing and drafting legal documents related to banking transactions, including loans, security agreements and guarantees.
4. Critical Analysis: To encourage students to critically analyse legal and regulatory issues in the banking sector, especially in the context of recent market and regulatory developments.
5. Industry Relevance: To ensure that students are well-prepared to address contemporary challenges in banking law, including those related to digital assets, ESG and the aftermath of recent banking crises.
Teaching / Learning Methodology / Methods
The course is organised in a traditional lecture / seminar format, based on the application of international and domestic laws, principles and regulations in Hong Kong. Student participation is encouraged and will form part of the learning experience through class participation.
Course Organisation / Coverage
The course is organised to focus on the business of banking, global regulatory standards, the regulatory framework in Hong Kong, legal documents for banking transactions as well as future legal and regulatory trends in banking.
Course Outcomes
At the end of the course, students should:
- Have a sound understanding of the roles and functions of banks within the global and local financial systems.
- Grasp key legal and regulatory principles and appreciate how they can be applied in practice to mitigate some of the risks associated with the business of banking.
- Be familiar with the structure and features of loan agreements, security agreements, guarantees, derivatives master agreements and other legal agreements used to document banking transactions.
Reading list
- Hong Kong Monetary Authority (“HKMA”) Guide to Authorization, available at: https://www.hkma.gov.hk/eng/regulatory-resources/regulatory-guides/guide-to-authorization/
- Federal Reserve Bank of Kansas City, Basics for Bank Directors, available at: https://www.kansascityfed.org/Banking/documents/209/BasicsForBankDirectors_KCFed.pdf
- Select executive summaries published by the Financial Stability Institute (“FSI”) under the auspices of the Bank for International Settlements (“BIS”): https://www.bis.org/fsi/publications.htm (filter for ‘Executive Summaries’ in the ‘Series’ dropdown menu). The specific executive summaries that you should read are set out in the reading list for each seminar.
Supplemental reading
- Goode and Gullifer on Legal Problems of Credit and Security (7th Edition)
Other useful resources / materials are publicly available and can be found on the following websites:
- HKMA: https://www.hkma.gov.hk/
- Securities and Futures Commission of Hong Kong (“SFC”): https://www.sfc.hk
- FSI: https://www.bis.org/fsi/index.htm
- Financial Stability Board (“FSB”): https://www.fsb.org/
- Basel Committee on Banking Supervision (“Basel Committee”): https://www.bis.org/bcbs/index.htm
Relevant Laws and Other Materials
The course will begin by addressing the development and application of global banking standards, which are largely based on non-binding (but highly technical and prescriptive) standards developed by international bodies such as the Basel Committee and the FSB. Later in the course, there will be a focus on Hong Kong ordinances and the application of common law principles. Frequent use will be made of Hong Kong and international statutes, case law and international standards throughout the course.
Assessment
The course assessment will be based on a combination of:
- Class participation (20%): This will comprise of a combination of class attendance and asking questions. This assessment is graded on a pass / fail basis.
- Take-home examination (80%): The take-home examination will be distributed on [*] and is due [72 hours later] (absolute deadline – no further extension will be approved). The take-home examination must be completed individually. The maximum length for the take-home examination is 3,500 words (including footnotes but excluding any bibliography). The exam will be distributed and submitted via Moodle.
The take-home exam will be graded based on quality of legal analyses, written expression and demonstrated familiarity with course materials / lectures / class presentations and subject-matter. If handed in late, your exam paper will be penalised at the rate of 5 points out of 100 per day and will not be accepted later than 7 calendar days after the deadline.
The Law Faculty’s rules prohibiting cheating, plagiarism and taking unfair advantage apply strictly to both written assignments and exam papers.
No plagiarism, etc.
Note that all written work will be run through plagiarism detection software as part of the submission process.
Attendance
Regular class attendance and class participation is expected. Generally, one does not meet this standard through conspicuous and regular absence or through inadequate class preparation. In addition, the structure of this class as a lecture / seminar encourages participation by students.
Preparation
Each student should read assigned resources and undertake (if requested) any additional reading specifically required for a particular pre-assigned topic.
Course Syllabus
Seminar No. 1: Course Outline; Introduction to Banks and the Business of Banking
[Date: Thursday, 12 September]
In this session, we will explore the fundamental roles and functions of banks within the financial system. We will examine the various types of banks, including commercial banks, investment banks, policy banks, digital banks and central banks, and their unique contributions to the economy. Key concepts such as lending, borrowing, risk management, and financial intermediation will be discussed. This session will also introduce the basic structure and operations of a typical bank, setting the stage for more detailed study in subsequent modules.
Compulsory reading:
- International Monetary Fund, Banks: At the Heart of the Matter, available at: https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Banks
- Bank for International Settlements, The Role of Banks (BIS Papers No 83), available at: https://www.bis.org/publ/bppdf/bispap83b_rh.pdf
- John J Di Clemente, Federal Reserve Bank of Chicago, What is a Bank? available at: https://www.chicagofed.org/-/media/publications/economic-perspectives/1983/ep-jan-feb1983-part2-diclemente-pdf.pdf
Recommended reading:
- Basel Committee, Core Principles for Effective Banking Supervision (June 2024), available at: https://www.bis.org/bcbs/publ/d573.pdf
- Brookings Papers on Economic Activity, The Evolution of Banking in the 21st Century: Evidence and Regulatory Implication, available at: https://www.brookings.edu/wp-content/uploads/2024/02/6_Hanson-et-al_unembargoed_updated.pdf
Seminar No. 2: Evolution of Global Banking Regulation: Capital, Liquidity and Prudential Standards
[Date: Thursday, 19 September]
This session will trace the historical development of global banking regulations, focusing on the critical areas of capital adequacy, liquidity requirements and prudential oversight. We will review significant regulatory frameworks such as Basel I, II, III, and more recent Basel prudential regulatory developments. The impact of these regulations on banking practices and financial stability will be analysed, with attention to how they aim to prevent financial crises. Real-world examples will illustrate the challenges and successes of implementing these regulatory standards across different jurisdictions.
Compulsory reading:
- FSI, Overview of Basel III and related post-crisis reforms - Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/b3_rpcr.pdf
- FSI, Basel Framework: scope of application - Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/scope_app.pdf
- FSI, Definition of capital in Basel III - Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/defcap_b3.pdf
- FSI, Liquidity Coverage Ratio (LCR) - Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/lcr.pdf
- FSI, Net Stable Funding Ratio (NSFR) - Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/nsfr.pdf
Recommended reading:
- Basel Committee, Basel III: A global regulatory framework for more resilient banks and banking systems - revised version June 2011, available at: https://www.bis.org/publ/bcbs189.pdf
- FSI, The G-SIB framework - Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/g-sib_framework.pdf
- FSI, Pillar 3 framework - Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/pillar3_framework.pdf
- Basel Committee, History of the Basel Committee and Its Membership (March 2001), available at: https://www.bis.org/publ/bcbsc101.pdf
Seminar No. 3: Hong Kong Banking Law and Regulatory Principles
[Date: Thursday, 26 September]
In this module, we will delve into the specific legal and regulatory environment governing banks in Hong Kong. Key regulatory bodies, such as the HKMA and the SFC, and their roles will be discussed. We will examine the Banking Ordinance and other relevant legislation that outline the legal framework for banking operations and the provision of other types of financial products and services in Hong Kong. This module will also cover recent regulatory developments and their implications for banks operating in Hong Kong.
Compulsory reading:
- HKMA, Guide to Authorization (chapters 1, 2, 3 and 4 only), available at: https://www.hkma.gov.hk/eng/regulatory-resources/regulatory-guides/guide-to-authorization/
- FSB, Peer Review of Hong Kong - Review Report (section 3 (Framework for resolution of financial institutions) and Annex 1 (Structure of the financial system and regulatory framework)), available at: https://www.fsb.org/wp-content/uploads/P280218-1.pdf
Recommended reading:
- SFC, Licensing Handbook, available at: https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/guidelines/licensing-handbook/licensing-handbook.pdf?rev=b2109e7546cb4080a66f40e645fc65ac
- Banking Ordinance (for reference only, no need to read in full), available at: https://www.elegislation.gov.hk/hk/cap155
- Securities and Futures Ordinance (for reference only, no need to read in full), available at: https://www.elegislation.gov.hk/hk/cap571
Seminar No. 4: Bank Deposits, Deposit Insurance and Bank Resolution in the Aftermath of the 2023 Banking Turmoil
[Date: Thursday, 3 October]
This session will focus on the importance of bank deposits and the mechanisms in place to protect them, particularly in light of the 2023 banking turmoil. We will discuss the concept of deposit insurance, its role in maintaining depositor confidence, and how it operates in Hong Kong compared to other major financial centres. Case studies from the 2023 crisis will be used to highlight the effectiveness and limitations of current deposit insurance schemes and potential reform proposals. We will also consider the topic of the orderly resolution of banks and other financial institutions, including how the resolution process compares with court-led bankruptcy/insolvency proceedings.
Compulsory reading:
- US Federal Deposit Insurance Corporation (“FDIC”), Options for Deposit Insurance Reform (July 2023), available at: https://www.fdic.gov/analysis/options-deposit-insurance-reforms/report/options-deposit-insurance-reform-full.pdf
- FSI, Bank resolution framework - Executive summary, available at: https://www.bis.org/fsi/fsisummaries/brf.pdf
- FSB, Peer Review of Hong Kong - Review Report (section 3 (Framework for resolution of financial institutions)), available at: https://www.fsb.org/wp-content/uploads/P280218-1.pdf
Recommended reading:
- Federal Reserve, Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank (April 2023), available at: https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf
- FSI, Core Principles for Effective Deposit Insurance Systems – Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/iadi_core_principles.pdf
- FSI, FSB Key Attributes - Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/fsb_key_attributes.pdf
- FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions, available at: https://www.fsb.org/wp-content/uploads/r_111104cc.pdf
Seminar No. 5: Legal Documents and Drafting Techniques: Syndicated Loan Agreement Case Study (Part 1)
[Date: Thursday, 10 October]
Starting with this session, we shift gears from theory towards practice. In the first part of this case study, we will introduce the structure and key components of a syndicated loan agreement. Students will learn about the roles of different parties to the agreement, and their legal relationships with each other. We will dissect the major clauses in a typical syndicated loan agreement, focusing on terms related to interest, payment mechanisms, representations and undertakings. Practical drafting tips and common pitfalls will be discussed to equip students with the basic skills needed to draft and negotiate loan agreements.
Compulsory reading:
- A Borrower’s Guide to the Asia Pacific Loan Market Association Syndicated Facility Agreement for Investment Grade Borrowers (June 2015), available at: https://actatreasury.com.au/wp-content/uploads/2015/06/A-Borrowers-Guide-to-the-Asia-Pacific-Loan-Markets-Association-Syndicated-Facility-Agreement-second-edition-5.pdf
Recommended reading:
- A Borrower’s Guide to the LMA’s Investment Grade Agreements (6th Edition) (November 2022), available at: https://www.treasurers.org/system/files/The%20ACT%20Borrower%E2%80%99s%20Guide%20to%20the%20LMA%E2%80%99s%20Investment%20Grade%20Agreements%20-%20Final.pdf
Seminar No. 6: Legal Documents and Drafting Techniques: Syndicated Loan Agreement Case Study (Part 2)
[Date: Thursday, 24 October]
Continuing from the previous session, this module will delve deeper into the drafting and negotiation techniques involved in a syndicated loan agreement. We will focus on common definitions and clauses and will consider common drafting techniques that are used to ‘close’ loopholes and make the provisions ‘future proof’. This hands-on approach will help students develop a nuanced understanding of the legal and commercial aspects of loan documentation.
Compulsory reading:
- A Borrower’s Guide to the Asia Pacific Loan Market Association Syndicated Facility Agreement for Investment Grade Borrowers (June 2015), available at: https://actatreasury.com.au/wp-content/uploads/2015/06/A-Borrowers-Guide-to-the-Asia-Pacific-Loan-Markets-Association-Syndicated-Facility-Agreement-second-edition-5.pdf
Recommended reading:
- A Borrower’s Guide to the LMA’s Investment Grade Agreements (6th Edition) (November 2022), available at: https://www.treasurers.org/system/files/The%20ACT%20Borrower%E2%80%99s%20Guide%20to%20the%20LMA%E2%80%99s%20Investment%20Grade%20Agreements%20-%20Final.pdf
Seminar No. 7: Security Interests and Guarantees in Banking Transactions
[Date: Thursday, 31 October]
In this session, we will explore the legal concepts and practical applications of security interests and guarantees in banking transactions. We will discuss the various types of security interests, focussing on charges and mortgages, and how they are created and perfected under Hong Kong law. The role of guarantees in mitigating credit risk will also be examined. Case studies will illustrate common issues and solutions in securing loans and other financial transactions.
Compulsory reading:
- Goode and Gullifer on Legal Problems of Credit and Security (7th Edition), Chapter 1: The Nature and Forms of Consensual Security
- Sample charge over receivables, publicly available here: https://www.sec.gov/Archives/edgar/data/1763197/000119312519255838/d637426dex1026.htm
- Sample deed of guarantee and indemnity, publicly available here: https://www.sec.gov/Archives/edgar/data/1650575/000121390018008637/fs12018a2ex10-25_borqstechno.htm
Recommended reading:
The following chapters of Goode and Gullifer on Legal Problems of Credit and Security (7th Edition):
- Chapter 2. Attachment And Perfection of a Security Interest: General Considerations
- Chapter 3. Attachment, Perfection and Effects of Fixed Security in Non-Documentary Receivables
- Chapter 4. The Floating Charge
- Chapter 5. Fixed and Floating Charges: Some Problems of Priority
- Chapter 6. Interests in Financial Collateral
Seminar No. 8: Derivatives – Regulation and Legal Documentation
[Date: Thursday, 7 November]
This session will consider the world of derivatives, focusing on their regulation and related legal documentation. We will explain the different types of derivative instruments, such as forwards, options and swaps, and their use for risk management and speculative/investment purposes. The regulatory framework for derivatives in Hong Kong and globally will be analysed, highlighting key regulatory themes. Students will also learn about the International Swaps and Derivatives Association (“ISDA”) Master Agreement and other standard legal documents used in derivative transactions.
Compulsory reading:
- ISDA Video: Understanding the ISDA Master Agreement, available at: https://www.isda.org/2022/05/11/video-understanding-the-isda-master-agreement/
- ISDA, 2002 ISDA Master Agreement, available at: https://www.gbm.hsbc.com/-/media/media/gbm-global/gbm-refresh/financial-regulations/attachments/2002-isda-ma.pdf?view=1
- ISDA, Evolution of OTC Derivatives Markets Since the Financial Crisis (January 2021), available at: https://www.isda.org/a/8jjTE/Evolution-of-OTC-Derivatives-Markets-Since-the-Financial-Crisis.pdf
Recommended reading:
- ISDA, User’s Guide to the ISDA 2002 Master Agreement, available at: https://www.rbccm.com/assets/rbccm/docs/legal/doddfrank/Documents/ISDALibrary/Users%20Guide%20to%20the%202002%20ISDA%20Master%20Agreement.pdf
- Legislative Council of Hong Kong, Overview of the Regulation of Over-the-counter Derivative Market, available at: https://www.legco.gov.hk/yr12-13/english/bc/bc12/papers/bc120724cb1-1608-1-e.pdf
- FSI, Margin requirements for non-centrally cleared derivatives - Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/margin_reqs.pdf
- FSI, Counterparty credit risk in Basel III - Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/ccr_in_b3.pdf
Seminar No. 9: Digital Assets and Banking Regulation
[Date: Thursday, 14 November]
In this session, we will examine the emerging field of digital assets and their interaction with the banking system. Topics will include cryptocurrencies, stablecoins, central bank digital currencies (“CBDCs”) and tokenisation, along with the legal and regulatory issues they pose. We will discuss how banks are adapting to the rise of digital assets, including issues related to custody, consumer protection and regulatory capital treatment. The role of regulatory sandboxes and other innovative approaches to regulation will also be explored.
Compulsory reading:
- FSB, High-level Recommendations for the Regulation, Supervision and Oversight of Crypto-asset Activities and Markets: Final report (July 2023), available at: https://www.fsb.org/wp-content/uploads/P170723-2.pdf
- FSI, Central Bank Digital Currencies Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/cbdcs.pdf
- FSI, Prudential treatment of cryptoasset exposures – Executive Summary, available at: https://www.bis.org/fsi/fsisummaries/crypto_exposures.pdf
Recommended reading:
- HKMA, Circular on risk management considerations related to the use of distributed ledger technology, available at: https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2024/20240416e1.pdf
- SFC, Circular on intermediaries engaging in tokenised securities-related activities, available at: https://apps.sfc.hk/edistributionWeb/api/circular/openFile?lang=EN&refNo=23EC52
- HKMA, Circular on provision of Custodial Services for Digital Assets, available at: https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2024/20240220e4.pdf
Seminar No. 10: ESG and Banking
[Date: Thursday, 21 November]
This session will focus on the growing importance of environmental, social, and governance (“ESG”) issues to the banking sector. We will discuss how ESG considerations are reshaping the banking industry, from lending practices to risk management and regulatory compliance. We will then take a deeper dive into green loans, sustainability-linked loans and sustainability-linked derivatives from a legal documentation perspective.
Compulsory reading:
- Green Loan Principles, available at: https://www.lsta.org/content/green-loan-principles/
- Sustainability-linked Loan Principles, available at: https://www.lsta.org/content/sustainability-linked-loan-principles-sllp/
- Basel Committee, Principles for the effective management and supervision of climate-related financial risks, available at: https://www.bis.org/bcbs/publ/d532.pdf
Recommended reading:
- FSI, The regulatory response to climate risks: some challenges (FSI Briefs No 16), available at: https://www.bis.org/fsi/fsibriefs16.pdf
- Basel, Frequently asked questions on climate-related financial risks, available at: https://www.bis.org/bcbs/publ/d543.pdf
Seminar No. 11: Putting It All Together: Recent Market and Regulatory Developments
[Date: Thursday, 28 November]
In this session, we will synthesize the key themes and lessons from the course by examining recent market and regulatory developments in the banking sector. We will analyse current trends, such as the impact of technological innovation, regulatory changes, and macroeconomic factors on banks. Case studies of significant events and regulatory responses will be used to illustrate how theoretical concepts are applied in practice. This session will also provide an opportunity for students to explore future challenges and opportunities in banking law.
Compulsory reading:
- FSB, 2023 Bank Failures: Preliminary lessons learnt for resolution, available at: https://www.fsb.org/wp-content/uploads/P101023.pdf
- Basel Committee, Report on the 2023 banking turmoil, available at: https://www.bis.org/bcbs/publ/d555.pdf
- Basel Committee, Digitalisation of finance (May 2024), available at: https://www.bis.org/bcbs/publ/d575.pdf
Recommended reading:
- Basel Committee, Principles for the sound management of third-party risk, available at: https://www.bis.org/bcbs/publ/d577.pdf
- HKMA, latest available Half-Yearly Monetary & Financial Stability Report, available at: https://www.hkma.gov.hk/eng/data-publications-and-research/publications/half-yearly-monetary-financial-stability-report/