Testing for Collusion in the Hong Kong Banking Sector

The banking industry in Hong Kong is characterized by the existence of a few major banking groups and a relatively high degree of market concentration. Reflecting this, the Herfindahl–Hirschman index (HHI)2 of the banking sector in Hong Kong is around 0.14 in 2005, which is higher than some other developed banking centres, such as the US (0.02), the UK (0.06) and Japan (0.06).3 The three-bank concentration ratio4 of Hong Kong is also high at around 0.56 in 2005, compared with 0.15 in the US, 0.34 in the UK, and 0.39 in Japan.5 Such a structure could be conducive to the forming of oligopolistic coordination, as large banks may gain strong market power and could exercise leadership in pricing. Indeed, the existence of the interest rate rules (IRRs) prior to 2001 had long been a competition concern. When the IRRs were in place, deposit rates offered by banks under an administered rate structure were to an extent dictated by the large banks. At the same time, the best lending rate (BLR), the reference rate for most bank loans, was set by the large banks, which was followed by other banks. There also appeared to be similar fee-setting trends among banks.6 Even after the full deregulation of the IRRs, for a considerable period of time banks still adopted the same BLR set by the large banks, although the effective interest rates could be different due to different mark-ups. It was not until April 2005 that smaller banks began to adjust their BLRs differently from large banks.7 However, the gap between different BLRs has so far never exceeded 25 basis points.