Determinants of International Bank Lending from the Developed World to East Asia

The reversal of capital flows from the banking sector, rather than portfolio equity investment, has long been considered a main reason for the severity of the East Asian financial crisis of the late 1990s. This study analyzes the factors behind the boom and bust of bank lending, focusing on loans from private banks in seven Organization for Economic Cooperation and Development countries to nine East Asian economies during the 1990–2004 period. The findings suggest that political instability and weaknesses in legal, judicial, and bureaucratic systems help explain the continued stagnation in lending after the financial crisis. Thus, institutional reforms are critical for East Asia to successfully compete for international bank financing.