International Overborrowing: A Decomposition of Credit and Currency Risks
AbstractFebruary 1998 The severity of the financial crises enveloping the âtigerâ economies of South East Asia in 1997 came as a surprise to many observers. This paper uses a simple Fisherian model of the âoverborrowing syndromeâ to compare the Asian crises of 1997 with earlier overborrowing episodes in Mexico and Chile. While important similarities exist, the crises in South East Asia have been exacerbated by the unhedged foreign exchange positions of Asian banks. These open currency positions not only imposed significant additional losses on the banks following devaluation, they also magnified the scale of overborrowing during the cycleâs initial boom phase. Failure to limit the exposure of banks to foreign exchange risk therefore increased the magnitude of the boom - bust overborrowing cycle both ex ante and ex post. The paper highlights the importance of effective regulation and supervision of capital markets, with a focus on limiting the speculative currency positions of banks, especially those that form the core of the domestic payments system and therefore enjoy a (possibly implicit) public guarantee. Improving the institutional infrastructure of financial supervision is the only effective way of mitigating the macroeconomic costs of overborrowing. JEL Classification: O16, F32, F34, E44. Keywords: Overborrowing, capital flows, financial crises, sectoral credit.
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Bibliographic InfoArticle provided by Elsevier in its journal World Development.
Volume (Year): 26 (1998)
Issue (Month): 7 (July)
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Other versions of this item:
- Ronald I. McKinnon & Huw Pill, 1998. "International Overborrowing: A Decomposition of Credit and Currency Risks," Working Papers 98004, Stanford University, Department of Economics.
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
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