The International Transmission of Shocks: Foreign Bank Branches in Hong Kong during Financial Crisis
Simon Kwan, Federal Reserve Bank of San Franciscoand Sveriges Riksbank
Cho-hoi Hui, Hong Kong Monetary AuthorityEric T.C. Wong, Hong Kong Monetary Authority
Views are ours only and do not necessarily reflect those of FRBSF, FRB, Riksbank, or HKMA
Introduction
• In this paper, we use the foreign bank branches in Hong Kong to examine the international transmission of shocks during the U.S. financial crisis and the euro zone sovereign debt crisis.
Literature
• Peek and Rosengren (1997)• Khwaja and Mian (AER 2008)• Cetorelli and Goldberg (AER P&P 2012)• Cetorelli and Goldberg (JIE 2012)• Wong, Tsang and Kong (HKMA mimeo 2014)
Research Design
• Exploit the large cross section of FBOs in HK whose parents are from all over the world.
• Are FBOs from countries experiencing financial crisis behaved differently in HK?
• A distinct host country perspective.
Areas of Focus
• Liquidity management– Holding of liquid assets– Intra-firm funding
• Lending – Lending for use in HK– Lending for use outside HK
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
3-month Libor-OIS SpreadPercent12/17/07
first TAFauction
9/15/08Lehman
bankruptcy
post-LTRO
pre-LTRO
pre-European debt crisis
post-Lehman
post-TAF,pre-
Lehman
pre-TAF
pre-financial
crisis
0
500
1000
1500
2000
2500
2009 2010 2011 2012 2013 2014
Germany
France
Spain
Italy
Greece
Portugal
Source: Bloomberg
Eurozone Sovereign 5-year CDS SpreadsBasis points12/21/11
first 3-year LTRO
Key events
• December 12, 2007, Federal Reserve announced Term Auction Facility (and FX swap lines).
• September 15, 2008, Lehman Brothers filed bankruptcy.
• Early 2010, onset of European sovereign debt crisis.
• December 8, 2011, ECB announced two LTROs
Methodology
• Difference-in-difference (in liquidity and lending) between FBOs from crisis countries and controls.
Variables of Interest
• Liquid assets• Net due from parent• Loans
– For use in Hong Kong– For use outside Hong Kong
• Retail deposits• Wholesale deposits• Total assets
Data
• Monthly foreign bank branches supervisory report to HKMA.
• 2004 to 2012• Exclude outliers• 89 FBOs from 8 geographical areas
Conclusions
• Little evidence of liquidity hoarding by FBOs during crisis
• US FBOs upstream funds to parents before TAF– Effect disappeared after TAF
• FBOs from crisis countries lend significantly less than controls– In both US crisis and euro debt crisis
Policy Implications
• Evidence of foreign shocks on host country banking sector warrants host country regulatory actions to mitigate the impact of foreign shocks on host country economy.– Liquidity buffers/requirements– Central bank liquidity facility– Lending supply shocks
Policy Implications
• Liquidity interventions (TAF and LTRO) might ease banks’ funding pressure.
• These policy initiatives could not ease banks’ willingness / ability to lend.
• Cleaning up banks’ balance sheets (using stress tests) might be the only way to unclog the bank lending channel.