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Impact of Deposit Rate Deregulation in Hong Kong on the Market Value of Commercial Banks

  • Simon H. Kwan

    (Federal Reserve Bank of San Francisco)

This paper examines the impact of deposit rate deregulation on the market value of banks in Hong Kong. We do not find that the release of the Consumer Council's Report "Are Hong Kong Depositors Fairly Treated?" in 1994 was associated with any significant stock market reaction, contrary to the hypothesis that banks had been extracting excess profits from depositors under the Interest Rate Rules ("IRR"). Even when the government decided to start deregulating time deposit interest rates, the stock market was indifferent to the announcement, further suggesting the lack of subsidy was incidental to the IRRs. The recent announcement of complete deregulation of the IRRs, however, was found to be associated with a significant positive stock market response. The findings suggest that IRRs deregulation would benefit, rather than hurt, bank earnings. Furthermore, large banks and banks with high growth rates, high net interest margins, and high liability costs are found to benefit more from deregulation.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 102000.

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Length: 18 pages
Date of creation: Nov 2000
Date of revision:
Handle: RePEc:hkm:wpaper:102000
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  1. Jaffe, Jeffrey F, 1974. "Special Information and Insider Trading," The Journal of Business, University of Chicago Press, vol. 47(3), pages 410-28, July.
  2. Millon-Cornett, Marcia H. & Tehranian, Hassan, 1989. "Stock market reactions to the depository institutions deregulation and monetary control act of 1980," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 81-100, March.
  3. Sam Peltzman, 1976. "Toward a More General Theory of Regulation," NBER Working Papers 0133, National Bureau of Economic Research, Inc.
  4. Jordan, William A, 1972. "Producer Protection, Prior Market Structure and the Effects of Government Regulation," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 151-76, April.
  5. Bhargava, Rahul & Fraser, Donald R., 1998. "On the wealth and risk effects of commercial bank expansion into securities underwriting: An analysis of Section 20 subsidiaries1," Journal of Banking & Finance, Elsevier, vol. 22(4), pages 447-465, May.
  6. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  7. Saunders, Anthony & Smirlock, Michael, 1987. "Intra- and Interindustry Effects of Bank Securities Market Activities: The Case of Discount Brokerage," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(04), pages 467-482, December.
  8. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  9. John J. Binder, 1985. "Measuring the Effects of Regulation with Stock Price Data," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 167-183, Summer.
  10. Sundaram, Sridhar & Rangan, Nanda & Davidson, Wallace III, 1992. "The market valuation effects of the Financial Institutions Reform, Recovery and Enforcement Act of 1989," Journal of Banking & Finance, Elsevier, vol. 16(6), pages 1097-1122, December.
  11. Bob Y. Chan & Terence Khoo, 1998. "An Analysis of the Deposit-taking Market of Hong Kong," Review of Industrial Organization, Springer, vol. 13(6), pages 651-667, December.
  12. Dann, Larry Y & James, Christopher M, 1982. " An Analysis of the Impact of Deposit Rate Ceilings on the Market Values of Thrift Institutions," Journal of Finance, American Finance Association, vol. 37(5), pages 1259-75, December.
  13. Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-53, September.
  14. Song, Frank M, 1994. "A Two-Factor ARCH Model for Deposit-Institution Stock Returns," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 323-40, May.
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