1. The International Transmission of Shocks: Foreign Bank Branches in Hong Kong during Financial Crisis Simon Kwan, Federal Reserve Bank of San Francisco and Sveriges Riksbank Cho-hoi Hui, Hong Kong Monetary Authority Eric T.C. Wong, Hong Kong Monetary Authority Views are ours only and do not necessarily reflect those of FRBSF, FRB, Riksbank, or HKMA

2. Introduction In this paper, we use the foreign bank branches in Hong Kong to examine the international transmission of shocks during the U.S. financial crisis and the euro zone sovereign debt crisis.

3. Literature Peek and Rosengren (1997) Khwaja and Mian (AER 2008) Cetorelli and Goldberg (AER P&P 2012) Cetorelli and Goldberg (JIE 2012) Wong, Tsang and Kong (HKMA mimeo 2014)

4. Research Design Exploit the large cross section of FBOs in HK whose parents are from all over the world. Are FBOs from countries experiencing financial crisis behaved differently in HK? A distinct host country perspective.

5. Areas of Focus Liquidity management – Holding of liquid assets – Intra-firm funding Lending – Lending for use in HK – Lending for use outside HK

9. Key events December 12, 2007, Federal Reserve announced Term Auction Facility (and FX swap lines). September 15, 2008, Lehman Brothers filed bankruptcy. Early 2010, onset of European sovereign debt crisis. December 8, 2011, ECB announced two LTROs

10. Methodology Difference-in-difference (in liquidity and lending) between FBOs from crisis countries and controls.

11. Variables of Interest Liquid assets Net due from parent Loans – For use in Hong Kong – For use outside Hong Kong Retail deposits Wholesale deposits Total assets

12. Data Monthly foreign bank branches supervisory report to HKMA. 2004 to 2012 Exclude outliers 89 FBOs from 8 geographical areas

13. US crisis on FBOs in HK: Pre-crisis to onset of crisis

14. US crisis on FBOs in HK: Pre-TAF to post-TAF

15. US crisis on FBOs in HK: Pre-Lehman to post-Lehman

16. Cumulative effects of US crisis on FBOs in HK

17. Euro debt crisis on FBOs in HK: pre-crisis to pre-LTRO

18. Euro debt crisis on FBOs in HK: pre-LTRO to post-LTRO

19. Conclusions Little evidence of liquidity hoarding by FBOs during crisis US FBOs upstream funds to parents before TAF – Effect disappeared after TAF FBOs from crisis countries lend significantly less than controls – In both US crisis and euro debt crisis

20. Policy Implications Evidence of foreign shocks on host country banking sector warrants host country regulatory actions to mitigate the impact of foreign shocks on host country economy. – Liquidity buffers/requirements – Central bank liquidity facility – Lending supply shocks

21. Policy Implications Liquidity interventions (TAF and LTRO) might ease banks’ funding pressure. These policy initiatives could not ease banks’ willingness / ability to lend. Cleaning up banks’ balance sheets (using stress tests) might be the only way to unclog the bank lending channel.

22. Thank You!