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

Simon Kwan, Eric T.C. Wong and Cho-hoi Hui
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Simon Kwan: Federal Reserve Bank of San Francisco and Hong Kong Institute for Monetary Research
Eric T.C. Wong: Hong Kong Monetary Authority
Cho-hoi Hui: Hong Kong Monetary Authority

No 22015, Working Papers from Hong Kong Institute for Monetary Research

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 (search for similar items in EconPapers)
JEL-codes: G01 G21 F65 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2015-01
New Economics Papers: this item is included in nep-ban and nep-ifn
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