ed
Federal Reserve Bank of Minneapois Quanern Review Fall (463
Figure 4
How an Exchange Rate Depreciation Can Help a Financial Firm
Balance Sheet Items Measured in Units of Foreign Currency.
Initially
After 50% Decline in HK Asset Values
After Asset Value Decline and 33% Depreciation
of
he
ge
int
ng
Assets
it
1
Loans backed by
EV.
ns
for
of
nd
'as
ere
ln
HK assets
denominated in HK$
Foreign assets
denominated in
foreign currency
Total
ke
lif
he
X
(1/2)(4/3)x
(1/21/4/3x
x + y
(2/3)x + y
(2.31x
Liabilities
Deposits
aenominated in HK$
(9/101x
(9/10)x
(2/3)(9/10)x
(9/10)y
(9/10)(x+y)
(9/10)
(9/10)(x+y)
(9.10у
(9/10) (2/3)x-vj
nd
are
nat
his
ice
ve,
me
for
ent
of
he
Other liabilities denominated in foreign currency
Total
Net Worth
1
of
Assets less Liabilities
[(2/3) (9/10)}x+
(1/10)(x+y)=
(1/10)x+(1/10
(1/10)y =
1-7/30)x+(1/10)y
(1/10)[(2/3)x+y] =
(1/15)x+(1/10y
ing
nh
212
et.
Th
25
12
re
12-
tion reduces the value of their deposits. At the same time. the value of assets in terms of foreign currency is the same whether or not a depreciation occurs. This is true in general. The extent of a depreciation of the Hong Kong dollar determines how the value of total assets is divided among categories of Labilities: the greater the deprecia- non of the Hong Kong dollar. the smaller the share that goes to deposits denominated in Hong Kong doliars.
Over the last two years, many Hong Kong financial
institutions seem to have been in positions like the one depicted here. If they were, then the Exchange Fund could easily have viewed a depreciation of the Hong Kong dollar as a way to avoid the major disruption to the economy that numerous financial fimm bankruptcies would cause. A depreciation could smooth the Hong Kong economy's adjustment to lower real property values in terms of foreign currency. The adjustment would be smoother not because financial firms capital losse
19