Review of Industrial Organization
13: 651–667, 1998.
1998 Kluwer Academic Publishers. Printed in the Netherlands.
An Analysis of the Deposit-taking Market of Hong
BOB Y. CHAN
Department of Economics and Finance, City University of Hong Kong
HSBC James Capel Asia
Abstract. 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.
Key words: Bank regulation, deposit-taking market, interest-rate spread.
This paper analyzes the market for bank deposits in Hong Kong. We examine the
bank regulatory environment and the level of competition in the deposit-taking
side of the banking industry. The analysis we present is of particular interest to the
understanding of the structure of banking markets and provides insights for bank
regulatory considerations. As Hong Kong will become a part of China in 1997,
our ﬁndings can also serve as a reference for the formulation of future regulatory
Our sample period covers an extended interval under which the regulatory
environment forbanks stayed relativelyconstant. In the early1990’s the Hong Kong
ConsumerCouncil studiedthe possible effectof the Interest RateAgreementamong
banks on the banking industry. Such efforts resulted in a report published in 1993,
suggesting that competition in Hong Kong depository markets was insufﬁcient. In
This paper is based on a consultancy project undertaken for the Consumer Council of Hong
Kong by the second author. We have beneﬁted from comments from the Consumer Council, the Hong
Kong Monetary Authority, Leonard Cheng (the Editor), Stephen Y.L. Cheung, Douglas Cook, Ira
Horowitz, Richard Y.K. Ho, Loretta Mester, three anonymous referees, and Conference participants
of the 1996 Financial Management Association Meeting. The opinions expressed in this paper do not
necessarily reﬂects the views of the Consumer Council of Hong Kong or HSBC James Capel Asia.
Any remaining errors belong to the authors.