An Analysis of the Deposit-taking Market of Hong Kong

This paper analyzes the deposit-taking market in Hong Kong prior to the deregulation of interest rates in 1994. We argue that banking regulations, in the forms of branching restrictions and interest-rate ceilings, had created a monopsonistic market for short-term bank deposits. As a result, banks in Hong Kong had earned a substantially wider interest-rate margin than banks in other Asia-Pacific countries and the United States. We provide procedures to estimate the economic significance of the foregone interest and find the monopsonistic rent to be in the order of 1% of the Gross Domestic Product of Hong Kong for the period 1987 through 1994.