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The monetary and banking system of H...

Chu, Kam Hon.

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The monetary and banking system of Hong Kong: A study from a free banking perspective.

Record Type:	Electronic resources : Monograph/item
Title/Author:	The monetary and banking system of Hong Kong: A study from a free banking perspective./
Author:	Chu, Kam Hon.
Published:	Ann Arbor : ProQuest Dissertations & Theses, : 1995,
Description:	237 p.
Notes:	Source: Dissertation Abstracts International, Volume: 56-12, Section: A, page: 4847.
Contained By:	Dissertation Abstracts International56-12A.
Subject:	Banking. -
Online resource:	http://pqdd.sinica.edu.tw/twdaoapp/servlet/advanced?query=NN02728
ISBN:	9780612027282

The monetary and banking system of Hong Kong: A study from a free banking perspective.
Chu, Kam Hon.

The monetary and banking system of Hong Kong: A study from a free banking perspective. - Ann Arbor : ProQuest Dissertations & Theses, 1995 - 237 p.

Source: Dissertation Abstracts International, Volume: 56-12, Section: A, page: 4847.

Thesis (Ph.D.)--University of Toronto (Canada), 1995.

A traditional argument against free banking is that it will ultimately fail because of information externalities. Under asymmetric information, it is difficult for depositors to tell whether a high deposit rate offered by a bank is due to its efficiency or its undertaking a risky lending strategy. This dissertation shows that a bank can use its deposit rate and portfolio to signal to depositors about its underlying quality. In a separating equilibrium, a higher-quality bank offers a lower deposit rate and holds a smaller proportion of risky loans than a lower-quality bank. This signalling mechanism provides a channel for market forces to function. Therefore, free banking is not inherently unstable. A free banking system, however, can be subject to contagious runs in a pooling equilibrium. Hong Kong is used as a case study because its banking system was close to a free banking system. Empirical results of both regression and cluster analysis applied to cross-sectional data for 1964-65 indicate that banks with higher liquidity ratios and lower deposit rates had, on average, higher profitability. These are consistent with the signalling hypothesis. Moreover, the 1965 banking crisis saw a switch of deposits from "low-quality" banks to "high-quality" banks, indicating market discipline. This study challenges the "efficiency" argument for deposit insurance by showing that an implicit or non-risk-rated deposit insurance scheme destroys the signalling mechanism and induces a moral hazard problem by encouraging banks towards risk-taking; deposit insurance also encourages poor-quality banks to enter the industry and therefore raises the systemic risk. Bank failure rates in Hong Kong, Canada, and the USA during 1935-1966 are compared statistically. These banking systems represented respectively a free banking system, a regulated system without deposit insurance, and one with both regulations and deposit insurance. The results are consistent with the argument that deposit insurance induces banks towards excessive risk-taking--hence more bank failures in USA. On the other hand, the Hong Kong bank failure rate was not significantly different from its Canadian counterpart. Historical evidence for 1864-1933 also indicates that free banking is not as unstable as most economists believe.

ISBN: 9780612027282Subjects--Topical Terms:

1557594
Banking.

The monetary and banking system of Hong Kong: A study from a free banking perspective.
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500 $a Source: Dissertation Abstracts International, Volume: 56-12, Section: A, page: 4847.
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520 $a A traditional argument against free banking is that it will ultimately fail because of information externalities. Under asymmetric information, it is difficult for depositors to tell whether a high deposit rate offered by a bank is due to its efficiency or its undertaking a risky lending strategy. This dissertation shows that a bank can use its deposit rate and portfolio to signal to depositors about its underlying quality. In a separating equilibrium, a higher-quality bank offers a lower deposit rate and holds a smaller proportion of risky loans than a lower-quality bank. This signalling mechanism provides a channel for market forces to function. Therefore, free banking is not inherently unstable. A free banking system, however, can be subject to contagious runs in a pooling equilibrium. Hong Kong is used as a case study because its banking system was close to a free banking system. Empirical results of both regression and cluster analysis applied to cross-sectional data for 1964-65 indicate that banks with higher liquidity ratios and lower deposit rates had, on average, higher profitability. These are consistent with the signalling hypothesis. Moreover, the 1965 banking crisis saw a switch of deposits from "low-quality" banks to "high-quality" banks, indicating market discipline. This study challenges the "efficiency" argument for deposit insurance by showing that an implicit or non-risk-rated deposit insurance scheme destroys the signalling mechanism and induces a moral hazard problem by encouraging banks towards risk-taking; deposit insurance also encourages poor-quality banks to enter the industry and therefore raises the systemic risk. Bank failure rates in Hong Kong, Canada, and the USA during 1935-1966 are compared statistically. These banking systems represented respectively a free banking system, a regulated system without deposit insurance, and one with both regulations and deposit insurance. The results are consistent with the argument that deposit insurance induces banks towards excessive risk-taking--hence more bank failures in USA. On the other hand, the Hong Kong bank failure rate was not significantly different from its Canadian counterpart. Historical evidence for 1864-1933 also indicates that free banking is not as unstable as most economists believe.
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