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Interest rate deregulation and banks' off-balance-sheet activities: a Hong Kong perspective

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  • Cheng
  • Fung
  • Hu
  • Cheng

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 the 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.

Suggested Citation

  • Cheng & Fung & Hu & Cheng, 2015. "Interest rate deregulation and banks' off-balance-sheet activities: a Hong Kong perspective," Applied Economics, Taylor & Francis Journals, vol. 47(47), pages 5088-5102, October.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:47:p:5088-5102
    DOI: 10.1080/00036846.2015.1042144
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    1. Nada Mora, 2010. "Can banks provide liquidity in a financial crisis?," Economic Review, Federal Reserve Bank of Kansas City, vol. 95(Q III), pages 31-67.
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