The International Transmission of Shocks: Foreign Bank Branches in Hong Kong During Crises

HKIMR Working Paper No.02/2015

27 Pages Posted: 17 Jan 2015

See all articles by Simon H. Kwan

Simon H. Kwan

Federal Reserve Bank of San Francisco

T. C. Wong

Hong Kong Monetary Authority - Research Department

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Date Written: January 16, 2015

Abstract

The international transmission of shocks in the global financial system has always been an important issue for policy makers. Different types of foreign shocks have different effects and policy implications. In this paper, we examine the effects of the recent U.S. financial crisis and the European sovereign debt crisis on foreign bank branches in Hong Kong. Unlike the literature on global banking that studies a global bank’s foreign operations from a home country perspective, our analysis uses foreign bank branches in Hong Kong and has a distinct host country perspective, which is more relevant to the host country policy makers. We find that global banks use their foreign branches in Hong Kong as a funding source during a liquidity crunch in the home country, suggesting that global banks manage their liquidity risk globally. After the central bank in the home country introduced a liquidity facility to relieve funding pressure, this effect disappeared. We also find strong evidence that foreign branches of banks in the crisis countries lend significantly less in Hong Kong relative to a control group, suggesting the presence of a lending channel in the transmission of shocks from the home country to the host country.

Keywords: Shocks Transmission, Foreign Banks, Financial Crisis, Liquidity Management

JEL Classification: G01, G21, F65

Suggested Citation

Kwan, Simon H. and Wong, Tak-Chuen and Hui, Cho-Hoi, The International Transmission of Shocks: Foreign Bank Branches in Hong Kong During Crises (January 16, 2015). HKIMR Working Paper No.02/2015. Available at SSRN: https://ssrn.com/abstract=2550696 or http://dx.doi.org/10.2139/ssrn.2550696

Simon H. Kwan (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3190 (Phone)

Tak-Chuen Wong

Hong Kong Monetary Authority - Research Department ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central,
Hong Kong
Hong Kong

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

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