The International Transmission of Shocks: Foreign Bank Branches in Hong Kong during Crises

Abstract

We examine the effects of the 2007-09 U.S. financial crisis and the 2011-12 European sovereign debt crisis on global banks’ foreign operation in Hong Kong. During both crises, foreign banks from crisis countries did not exhibit significantly different liquidity management than banks from non-crisis countries, suggesting that the liquidity interventions by the home countries’ central banks seemed effective. However, foreign banks from crisis countries significantly pulled back their lending in Hong Kong, relative to their non-crisis counterparts, resulting in significantly slower asset growth. Our results suggest the possibility of a lending channel in the transmission of shocks from the home country to the host country. On the other hand, quantitative easing by central banks is found to have significant effects on their global banks’ liquidity management in Hong Kong. Foreign banks held less liquid assets, and up streamed less funds to their parents when their home country central bank conducted QE. QE banks in Hong Kong are also found to lend less, and grew their assets slower, than non-QE banks.