Document Type

Case Study

Case Series

Broad-Based Emergency Liquidity

JEL Codes

G01, G28


In 1965, new prudential regulations and a real estate downturn triggered deposit runs in the British colony of Hong Kong that impacted local Chinese banks with large exposures to unfinished real estate projects and other illiquid assets. As a result of authorities’ laissez-faire approach to the banking system, Hong Kong had no central bank or any other formal lender-of-last-resort (LOLR) policy when the crisis unfolded. Instead, two private British banks, Hong Kong and Shanghai Banking Corporation (HSBC) and Chartered Bank, provided emergency loans at market rates for commercial banks facing deposit withdrawals. Following each bank run, either HSBC or Chartered Bank intervened and publicly declared support, typically expressed as unlimited, for a distressed bank. HSBC, as the largest bank in Hong Kong, played the dominant role as private LOLR given its large, conservatively managed balance sheet that protected the bank from runs. However, the two banks did not disclose most of the terms of the emergency lending arrangements throughout the crisis. Although HSBC’s initial pledge of liquidity assistance helped temporarily stave off deposit runs, inconsistent communication over the extent of its LOLR support undermined subsequent attempts to restore confidence in vulnerable banks. As bank runs continued, the government eventually intervened by introducing emergency liquidity policies: it set limits on deposit withdrawals, authorized British sterling as legal tender, and created a provision to return surplus banknotes to HSBC and Chartered Bank. The combined efforts by the government, HSBC, and Chartered Bank contained the effects of the crisis to local Chinese banks, and by the end of the year, only three of the 87 banks in Hong Kong had failed.

Date Revised