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Capital Management and Leverage of Foreign Bank Subsidiaries in a Host Country: A Case in Hong Kong

Author

Listed:
  • Kelvin Ho

    (Hong Kong Monetary Authority)

  • Cho-Hoi Hui

    (Hong Kong Monetary Authority)

  • Ka-Fai Li

    (Hong Kong Monetary Authority)

  • Jim Wong

    (Hong Kong Monetary Authority)

Abstract

The large presence of global banks in Hong Kong offers a well suited empirical setting to study the capital management of foreign bank subsidiaries from a host country perspective. Specifically, this paper uses the trade-off theory of leverage to investigate whether the leverage dynamics of foreign bank subsidiaries in the host country would behave differently to domestic banks. Similar to the behavior uncovered empirically of non-financial firms, we find that the standard determinants of leverage are applicable to banks in Hong Kong. In particular, there is a mean-reverting force which acts as a self-correcting mechanism for their leverage, with over-leveraged banks having a tendency to decrease their leverage, and vice versa. However, the self-correcting mechanism of banks' leverage may in times be unduly disturbed by abundant global liquidity, with the effect on foreign bank subsidiaries tangibly higher than that on domestic banks. The externality generated by current abundant global liquidity affecting foreign bank subsidiaries may require the implementation of macro-prudential policies in the host country to contain the risks stemming from the high leverage of banks and external liquidity shocks.

Suggested Citation

  • Kelvin Ho & Cho-Hoi Hui & Ka-Fai Li & Jim Wong, 2015. "Capital Management and Leverage of Foreign Bank Subsidiaries in a Host Country: A Case in Hong Kong," Working Papers 032015, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:032015
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Bank Leverage; Global Banks¡¦ Subsidiaries; Speed of Adjustment; Global Liquidity; Trade-Off Theory;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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