Dissertation: Financial Crisis 2008 Threat or Opportunity for Banks in Hong Kong

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Financial Crisis: Threat or Opportunity for Banks in Hong Kong

Impacts Of Financial Crisis To HK Banks

It was reported on March 15th, 2010, that Hong Kong shares "rose early Tuesday, shaking off fears about monetary tightening by China that dragged down the market in the previous two sessions as banks and resource stocks advanced after broad overnight gains on Wall Street." (Market Pulse, 2010) in 2008 the banking environment in Hong Kong was characterized by government assistance directed toward backing bank deposits totally $773 billion through 2010. The Hong Kong Monetary Authority had stated at that time that it was "prepared to provide capital to the territory's 23 locally incorporated banks, following the example of the United States and Britain." (Bradsher, 2008)

Hong Kong banks were stated to be among "the most heavily capitalized in the world…" (Bradsher, 2008) it was claimed by the financial secretary of Hong Kong, John Tsang that the Hong Kong banking system was both "healthy and robust" but that however, Hong Kong banking must make preparations for a rainy day." (Bradsher, 2008) it is additionally stated that Hong Kong would "back its deposit guarantee with its foreign exchange reserves, now $161 billion." (Bradsher, 2008) This work will examine the impact that the subprime mortgage crisis of 2008 in the United States had on the Hong Kong Banking Industry.

II. RETAIL BANKS in HONG KONG

A. BEFORE FINANCIAL CRISIS

The work of Hall, Kenjegalieva and Simper (2008) entitled: "Environmental Factors Affecting Hong Kong Banking: A Post-Asian Financial Crisis Efficiency Analysis" states "The Asian Financial Crisis (AFC), which erupted in Thailand during the Summer of 1997 and went on to cause such economic and financial devastation in the region in ensuing years, has been well documented (see, for example, Goldstein (1998) Hunter, Kaufman and Krueger (1999), and Jao (2001). Hong Kong was one of just a few countries in the region to escape relatively unscathed, successfully avoiding a banking crisis although, of course, some damage was inflicted on the banks." (Hall, Kenjegalieva and Simper, 2008)

Hall, Kenjegalieva and Simper (2008) additionally report that there was indirect damage inflicted on the real economy by the AFC a banking crisis was still avoided. Only one local bank is stated to have "slipped into the red" which is stated to be "in stark contrast to the experience of 1983-86 when a major banking crisis occurred due to a collapse in asset prices and specifically due to "the uncertainty surrounding Hong Kong's transition from a British Crown Colony to a Special Administration Region of the PRC, mismanagement including over-exposure to the property sector and fraud. Hong Kong Banks are stated to have dropped in profitability sharply with stabilization failing to be established until the fourth quarter of 1999." (Hall, Kenjegalieva and Simper, 2001)

The three-tier banking system was implemented in 1990. Market entry criteria for foreign banks were also relaxed in May 2002. Such, then, was the nature of the more liberal regulatory environment within which Hong Kong's banks operated post-1999, and the banks have been able to engage in renminbi-dominated 'retail' banking operations since January 2004. It is reported that the focus should likely be on that of the interest rate liberalization program and relaxed market entry criteria.

It is also reported that the Hong Kong Monetary Authority noted as early as 2002 that "the increased competition had resulted in a reduction in bank lending spreads, particularly in the mortgage loan market, and downward pressure on net interest margins, particularly for small banks. Some banks, however, and especially the larger ones, managed to offset such adverse effects on profitability by boosting non-interest (i.e. fee and commission-based) income and reducing operating costs by, for example, encouraging customers with low and volatile balances to use less-costly delivery channels, such as the Internet. Account charges are now also the norm. As far as the smaller banks are concerned, the introduction of deposit insurance in 2006 should have acted to increase the relative attraction of small licensed banks by reducing the competitive advantage enjoyed by "Too-Big-Too-Fail" banks; whilst many also view deposit deregulation as an opportunity allowing them to compete more effectively for deposits with large listed banks. Finally, the opening-up of some renminbi-denominated business to Hong Kong's licensed banks in January 2004 has served to provide these banks with some additional revenue, despite the PRC's stringent capital controls. Moreover, the Chinese government's subsequent decision to relax exchange controls by allowing Mainland banks to issue renminbi-denominated credit cards which can be used at ATMs in Hong Kong should further boost fee income for the latter region's banks." (Hall, Kenjegalieva and Simper, 2001)

B. AFTER FINANCIAL CRISIS

It is reported in the work of Daniel Po-min Chan (2008) in the work entitled: "Hong Kong Faces Sub-prime Contagion" published in the Hong Kong Journal that despite the resilience of the Hong Kong economic outlook, that the story is quite different in the property and stock markets in that the "outbreak of the subprime crisis increased the possibility of having negative real interest rates." (Chan, 2008) the Hong Kong currency is stated to be "pegged to the U.S. dollar…" (Chan, 2008) it is reported that local banks in Hong Kong lowered their rates to only 3% and inflation was stated at approximately 5% therefore the result is that the "local real estate market has seen negative lending interest rates…creating a favorable environment for real estate investment." (Chan, 2008) Problematic are residential property prices which rose "so dramatically…that these can be difficult to sustain." (Chan, 2008) in addition, it is reported that the local lending rate was expected to "bottom out despite a further U.S. rate cut in April." (Chan, 2008)

Hong Kong is one of the fastest growing of all world international finance centers servicing its domestic economy as well as China and the Southeast Asian region." (Hall, Kenjegalieva and Simper, 2001) the banking industry of Hong Kong is reported to be "robust with 68 of the world's 100 largest banks having a presence" in Hong Kong. There are presently the following types of banks doing business in Hong Kong:

Licensed Banks

Restricted License Banks

27

Deposit Taking Companies

28

Owned by Sovereign Entitles

29

Included in the three-tier system of deposit-taking institutions in Hong Kong are the following:

(1) Licensed banks: In Hong Kong, only licensed banks can operate current and savings accounts, accept deposits of any size and maturity from the public and pay or collect checks drawn by or paid in by customers. There are currently 23 licensed banks incorporated in Hong Kong and 125 licensed banks incorporated outside Hong Kong.

(2) Restricted license banks: Restricted license banks are principally engaged in merchant banking and capital market activities. They can take deposits of any maturity of HK$500,000 (approximately U.S.$64,103) and above. There are currently 14 restricted license banks incorporated in Hong Kong and 12 restricted license banks incorporated outside Hong Kong.

(3) Deposit taking companies: Deposit taking companies are owned by or otherwise associated with banks. These companies engage in a range of specialized activities, including consumer finance and securities business. They may take deposits of HK$100,000 (approximately U.S.$12,821) or above with an original term of maturity of at least three months. There are currently 28 locally incorporated deposit-taking companies. (Janus, 2010)

Joseph Yam, Chief Executive of the Hong Kong Monetary Authority at the Joint HKAB stated in his "Reflections Relevant to the Banking Profession in Hong Kong" that the well-capitalized banks in Hong Kong have fared well as they were "well prepared for shock. Crisis management, particularly when public confidence momentarily came under strain, was effective. The generally cautious approach of our bankers, your refusal to get carried away by innovation, helped minimize the damage: this is a vindication of your reputation for prudence, and a great credit to Hong Kong's banking system. We also seem to have achieved a good balance in the relationship between the supervisor and the banking system. "(Yam, 2009)

Yam relates that a primary example of "how that balance has contributed to banking stability is the 70% loan-to-value policy for residential mortgage lending by banks. This policy, now a cornerstone of our prudential arrangements, pre-dates even the foundation of the HKMA and evolved out of a productive dialogue between HKAB and the supervisor. It has survived strong political pressure for relaxation and market pressure for innovative credit risk transfer through securitization. The policy -- now nearly two decades old -- fits in well with the macro-prudential approach which, particularly in the light of the recent crisis, supervisors in other jurisdictions now consider to be essential to banking stability. The fact that no such policy existed in the advanced financial systems is remarkable enough. But what is more remarkable is the level of initiative of the Hong Kong banking sector itself in seeing the importance of systemic stability and giving it precedence over the profitability of individual institutions." (Yam, 2009)

Yam observes that there is a real need to "move with the times" and states that the past… [END OF PREVIEW]

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"Financial Crisis 2008 Threat or Opportunity for Banks in Hong Kong."  Essaytown.com.  March 19, 2010.  Accessed October 14, 2019.
https://www.essaytown.com/subjects/paper/financial-crisis-2008-threat-opportunity/42582.