Capital Management and Leverage of Foreign Bank Subsidiaries in a Host Country: A Case in Hong Kong

HKIMR Working Paper No. 03/2015

32 Pages Posted: 29 Jan 2015

See all articles by Kelvin Ho

Kelvin Ho

Hong Kong Monetary Authority

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Ka-Fai Li

Hong Kong Monetary Authority

Jim Wong

Hong Kong Monetary Authority

Date Written: January 28, 2015

Abstract

The large presence of global banks in Hong Kong offers a well suited empirical setting to study the capital management of foreign bank subsidiaries from a host country perspective. Specifically, this paper uses the trade-off theory of leverage to investigate whether the leverage dynamics of foreign bank subsidiaries in the host country would behave differently to domestic banks. Similar to the behavior uncovered empirically of non-financial firms, we find that the standard determinants of leverage are applicable to banks in Hong Kong. In particular, there is a mean-reverting force which acts as a self-correcting mechanism for their leverage, with over-leveraged banks having a tendency to decrease their leverage, and vice versa. However, the self-correcting mechanism of banks’ leverage may in times be unduly disturbed by abundant global liquidity, with the effect on foreign bank subsidiaries tangibly higher than that on domestic banks. The externality generated by current abundant global liquidity affecting foreign bank subsidiaries may require the implementation of macro-prudential policies in the host country to contain the risks stemming from the high leverage of banks and external liquidity shocks.

Keywords: Bank Leverage, Global Banks’ Subsidiaries, Speed of Adjustment, Global Liquidity, Trade-Off Theory

JEL Classification: E44, F36, G21, G32

Suggested Citation

Ho, Kelvin and Hui, Cho-Hoi and Li, Ka-Fai and Wong, Jim, Capital Management and Leverage of Foreign Bank Subsidiaries in a Host Country: A Case in Hong Kong (January 28, 2015). HKIMR Working Paper No. 03/2015. Available at SSRN: https://ssrn.com/abstract=2556716 or http://dx.doi.org/10.2139/ssrn.2556716

Kelvin Ho

Hong Kong Monetary Authority ( 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

Ka-Fai Li (Contact Author)

Hong Kong Monetary Authority ( email )

55/F 2 IFC, 8 Finance Street
Central
Hong Kong
Hong Kong

Jim Wong

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

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