Impact of Deposit Rate Deregulation in Hong Kong on the Market Value

This paper examines the impact of deposit rate deregulation on the market value of banks in Hong Kong. We do not find that the release of the Consumer Council’s Report “Are Hong Kong Depositors Fairly Treated? ” in 1994 was associated with any significant stock market reaction, contrary to the hypothesis that banks had been extracting excess profits from depositors under the Interest Rate Rules (“IRR”). Even when the government decided to start deregulating time deposit interest rates, the stock market was indifferent to the announcement, further suggesting the lack of subsidy was incidental to the IRRs. The recent announcement of complete deregulation of the IRRs, however, was found to be associated with a significant positive stock market response. The findings suggest that IRRs deregulation would benefit, rather than hurt, bank earnings. Furthermore, large banks and banks with high growth rates, high net interest margins, and high liability costs are found to benefit more from deregulation. This paper was written while the author was visiting the Hong Kong Institute for Monetary Research. The views presented in thi