Complexity of Global Banks and Their Foreign Operation in Hong Kong

28 Pages Posted: 5 Dec 2019

See all articles by Simon H. Kwan

Simon H. Kwan

Federal Reserve Bank of San Francisco

Kelvin Ho

Hong Kong Monetary Authority

Edward Tan

Hong Kong Monetary Authority

Date Written: November 20, 2019

Abstract

This paper studies the relation between the complexity of global banking organizations and their foreign banking operations (FBOs) in Hong Kong. Our empirical evidence indicates that the complexity of the parent company has significant effects on their Hong Kong branch’s business model, liquidity management, risk-taking, and profitability. The more complex the global banking organizations, the more likely their Hong Kong FBOs are to derive a larger share of revenues from fee-based activities, and incur a higher cost of production despite enjoying a funding cost advantage. Notwithstanding the FBOs in Hong Kong may serve as a funding hub for its parent company, FBOs of more complex global banks tend to hold more liquid assets. While our empirical evidence suggests that the complexity of global banks has significant effects on FBOs’ risk-taking and profitability, the relation depends on how complexity is measured. For example, both the BCBS complexity score and the measure of geographic complexity are significant in explaining FBO profitability, but they have different signs. Likewise, geographic complexity and scope complexity are often found to have significantly different effects on FBOs’ performance. Taken together, the concept of global bank complexity has multiple dimensions, where different facets could have qualitatively different effects on FBOs in Hong Kong.

Keywords: Complexity, Global Banks, Foreign Banks

JEL Classification: G21, F65

Suggested Citation

Kwan, Simon H. and Ho, Kelvin and Tan, Edward, Complexity of Global Banks and Their Foreign Operation in Hong Kong (November 20, 2019). Available at SSRN: https://ssrn.com/abstract=3490461 or http://dx.doi.org/10.2139/ssrn.3490461

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)

Kelvin Ho

Hong Kong Monetary Authority ( email )

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

Edward Tan

Hong Kong Monetary Authority ( email )

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

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