Regulation of Deposit Interest Rates in Hong Kong

383
DOI: 10.20542/0131-2227-2015-10-77-83

M. Leonov, Humboldt University of Berlin, 33 Juliusstr., Berlin, 12051, Deutschland (leonovmi@hu-berlin.de).

Abstract. In 1960s, the regulation of deposit interest rate was introduced to maintain stability of the banking system in Hong Kong. Local regulatory mechanism was characterized by direct involvement of banks into determination of the maximum level of interest rates. As deposit rates might be fixed at below market equilibrium level, banks were unbounded to earn rents at the expense of undrawn interest payments to depositors. Unlike to people in other countries, the depositors in Hong Kong had limited access to alternative investment opportunities like mutual funds or deposit institutions. As long as retail deposits were accounted for a significant share of borrowed funds, Hong Kong Association of Banks developed some incentives to discipline banks: in particular, if bank offered deposits with above the maximum permissible rate, it could be excluded from the national clearing and settlement infrastructure. The binding level of rates led to the emergence of new financial products (swap-deposits and NOW accounts) because banks tried to retain dissatisfied customers. To avoid the negative consequences of rate regulation on industry competition and allocation of financial resources within the economy, Hong Kong Monetary Authority took decision to liberalize deposit rates using gradual reform approach in the mid-1990s – early 2000s. The deregulation caused the significant reduction of gap between deposit and market rates and that evidence gave support to the idea of restrictive nature of regulation regime in Hong Kong. At the time of increasing competition in the deposit market, banks were able to increase operating efficiency and maintain profitability. The main benefits were obtained by banks with risky business model that attracted retail deposits to increase the scope of activity. Deposit rate liberalization helped to improve the efficiency of the transmission mechanism of monetary policy. As banks more actively responded to the market situation by adjusting interest rates, the monetary policy actions increased influence on the investment and savings behavior of economic agents. Finally, intensified interest rate competition among banks resulted into the growth of depositors’ welfare, contributing to the sustainable socio-economic development of Hong Kong.

Keywords: banking regulation, retail deposits, deposit pricing, Hong Kong


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For citation:
Leonov M. Regulation of Deposit Interest Rates in Hong Kong. World Eonomy and International Relations, 2015, No 10, pp. 77-83. https://doi.org/10.20542/0131-2227-2015-10-77-83



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