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

Cheuk Sang Cheng, King Fai Fung, Keri Peicong Hu, Tsz Wan Cheng

Research output: Journal article publicationJournal articleAcademic researchpeer-review

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.
Original languageEnglish
Pages (from-to)5088-5102
Number of pages15
JournalApplied Economics
Volume47
Issue number47
DOIs
Publication statusPublished - 1 Jan 2015

Keywords

  • Hong Kong banks
  • interest rate deregulation
  • off-balance-sheet activities

ASJC Scopus subject areas

  • Economics and Econometrics

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