Interest Rate Deregulation and Banks’ Off-Balance-Sheet Activities: A Hong Kong Perspective

Applied Economics, 47:47, 5088-5102 (2015)

Posted: 28 Oct 2016

See all articles by Arnold C S Cheng

Arnold C S Cheng

Hong Kong Polytechnic University

Michael K. Fung

Hong Kong Polytechnic University - School of Accounting & Finance

Keri Peicong Hu

University of California

Louis T. W. Cheng

The Hang Seng University of Hong Kong - Department of Economics and Finance

Date Written: May 19, 2015

Abstract

Through the interest rate deregulation and banks’ off-balance-sheet activities (OBSAs) in Hong Kong, this study investigates the debate over the impact of banking deregulation on banks’ risk-taking behaviour. On one hand, the Arrow effect implies that increased competition caused by the interest rate deregulation motivates Hong Kong banks to speed up their development of OBSAs as an additional but riskier income source. On the other hand, the Schumpeterian effect implies that the deregulation may reduce the banks’ financial capability in developing new products and thus downscale their OBSA adoption. Our findings show that, while the negative scale effect is statistically insignificant, the interest rate deregulation has a positive and significant impact on the adoption rate for all OBSA categories. We therefore conclude that the interest rate deregulation unambiguously leads to riskier bank behaviour in terms of higher OBSA adoption.

Keywords: Interest rate deregulation, Off-balance-sheet activities, Hong Kong banks

JEL Classification: G21, O33

Suggested Citation

Cheng, Arnold C S and Fung, Michael K. and Hu, Keri Peicong and Cheng, Louis T. W., Interest Rate Deregulation and Banks’ Off-Balance-Sheet Activities: A Hong Kong Perspective (May 19, 2015). Applied Economics, 47:47, 5088-5102 (2015), Available at SSRN: https://ssrn.com/abstract=2860444

Arnold C S Cheng

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

Michael K. Fung (Contact Author)

Hong Kong Polytechnic University - School of Accounting & Finance ( email )

Hung Hom, Kowloon
Hong Kong

Keri Peicong Hu

University of California ( email )

540 Alumni Ln
Davis, CA 95616
United States

Louis T. W. Cheng

The Hang Seng University of Hong Kong - Department of Economics and Finance ( email )

Hang Shin Link
Siu Lek Yuen
Shatin
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
353
PlumX Metrics