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Interest rate and exchange rate exposures of banking institutions in pre-crisis Korea

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  • Joon-Ho Hahm
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    Abstract

    This study empirically investigates interest rate and exchange rate exposures of banking institutions in pre-crisis Korea. Using the sensitivity of stock returns as a measure of the exposure, it is shown that Korean commercial banks and merchant banking corporations had been significantly exposed to both interest rate and exchange rate risks, and that the subsequent profitability of commercial banks was significantly associated with the degree of pre-crisis exposure. The evidence suggests that, along with the negative exposure of banking institutions, the sharp depreciation of the Korean won and high interest rates at the end of 1997 further deteriorated the banking sector's capital adequacy worsening the financial crisis. The Korean case highlights the importance of upgrading financial supervision and risk management practices as a precondition for successful financial liberalization.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684042000206979
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 36 (2004)
    Issue (Month): 13 ()
    Pages: 1409-1419

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    Handle: RePEc:taf:applec:v:36:y:2004:i:13:p:1409-1419

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    Cited by:
    1. Lukas Menkhoff & Chodechai Suwanaporn, 2007. "On the rationale of bank lending in pre-crisis Thailand," Applied Economics, Taylor & Francis Journals, vol. 39(9), pages 1077-1089.
    2. Eric Wong & Jim Wong & Phyllis Leung, 2008. "The Foreign Exchange Exposure of Chinese Banks," Working Papers 0807, Hong Kong Monetary Authority.
    3. José Eduardo Gómez Gónzalez & Jorge Marío Uribe Gil & Hernán Piñeros Gordo, . "Determinantes de la Rentabilidad de los Bancos en Colombia: ¿Importa la Tasa de Cambio?," Borradores de Economia 556, Banco de la Republica de Colombia.
    4. Wong, Tak-Chuen & Wong, Jim & Leung, Phyllis, 2009. "The foreign exchange exposure of Chinese banks," China Economic Review, Elsevier, vol. 20(2), pages 174-182, June.

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