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Does short-term debt increase vulnerability to crisis? Evidence from the East Asian financial crisis

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  • Eyal Dvir
  • Efraim Benmelech

Abstract

Does short-term debt increase vulnerability to financial crisis, or does causality go the other way, so that short term debt reflects rather than causes the incipient crisis? We approach this question empirically by examining the banking sector in five East Asian economies that were affected by the financial crisis of 1997-8. We put together a firm-level database that includes information on banks’ debt obligations as well as on bank failures following the crisis. We deal with potential endogeneity of short term debt by using certain long term debt obligations instead. These are debt obligations that mature at the time of the crisis, and therefore add to the bank’s vulnerability, but since they were contracted many years previously, cannot be mistaken as an endogenous response to changing conditions or expectations in the period immediately before the crisis. We find that such debt obligations that were contracted four years or more before the crisis have a negative, albeit sometimes insignificant effect on the probability of failure. Our results are therefore consistent with an interpretation of short-term debt as reflecting, rather than causing, distress in the banking sector. However, our findings do not rule out the hypothesis that exposure to roll-over risk contributed to bank failure in the East Asian crisis.

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Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2010)
Issue (Month): Oct ()
Pages:

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Handle: RePEc:fip:fedfpr:y:2010:i:oct:x:1

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Keywords: Financial crises - Asia;

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Cited by:
  1. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 1. Drivers of Systemic Banking Crises: The Role of Bank-Balance-Sheet Contagion and Financial Account Structure," OECD Economics Department Working Papers 902, OECD Publishing.
  2. Bartoli, Francesca & Ferri, Giovanni & Murro, Pierluigi & Rotondi, Zeno, 2013. "Bank–firm relations and the role of Mutual Guarantee Institutions at the peak of the crisis," Journal of Financial Stability, Elsevier, vol. 9(1), pages 90-104.
  3. Gianni La Cava, 2013. "Inventory Investment in Australia and the Global Financial Crisis," RBA Research Discussion Papers rdp2013-13, Reserve Bank of Australia.
  4. Rudiger Ahrend & Antoine Goujard & Cyrille Schwellnus, 2012. "International Capital Mobility: Which Structural Policies Reduce Financial Fragility?," OECD Economic Policy Papers 2, OECD Publishing.

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