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Precarious credit equilibria: reflections on the Asian financial crisis

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  • Joseph Bisignano
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    Abstract

    This paper examines some of the origins of the recent East Asian financial crisis. It is composed of three parts. The first considers the role of moral hazard in the crisis, specifically the influence of implicit and explicit government guarantees which may have contributed to excess borrowing in East Asia, similar to what occurred in Latin America during the 1980s. We then consider the role played by weaknesses in prudential regulation and supervision of both banks and non-bank financial intermediaries. Insufficient official oversight and poor corporate governance arguably were at the root of the limited financial transparency which prevented the correct assessment of risks by market participants. The combination of these two factors can be argued to have shifted credit markets from an equilibrium with excess borrowing to one with excessive credit rationing, resulting in a severe liquidity crisis. Comparisons are made with the micro-financial vulnerabilities which eventually led to earlier financial crises in Latin America and the Nordic countries.

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 64.

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    Length: 57 pages
    Date of creation: Mar 1999
    Date of revision:
    Handle: RePEc:bis:biswps:64

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    1. Michael P. Dooley, 1997. "A Model of Crises in Emerging Markets," NBER Working Papers 6300, National Bureau of Economic Research, Inc.
    2. Joseph E. Stiglitz, 1991. "Government, Financial Markets, and Economic Development," NBER Working Papers 3669, National Bureau of Economic Research, Inc.
    3. Jaffee, Dwight M & Russell, Thomas, 1984. "Imperfect Information, Uncertainty, and Credit Rationing: A Reply," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(4), pages 869-72, November.
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    Cited by:
    1. Sungsup Ra, 2005. "Bad Credit Equilibria with the Abnormally Utilized Commerical," Finance, EconWPA 0503012, EconWPA.
    2. Pablo Bustelo & Clara Garcia & Iliana Olivie, 1999. "Global and Domestic Factors of Financial Crises in Emerging Economies: Lessons from the East Asian Episodes (1997-1999)," Working Papers, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales 002, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.
    3. Arias, Guillaume & Erlandsson, Ulf, 2004. "Regime switching as an alternative early warning system of currency crises - an application to South-East Asia," Working Papers, Lund University, Department of Economics 2004:11, Lund University, Department of Economics.
    4. Jane Sneddon Little & Giovanni P. Olivei, 1999. "Why the interest in reforming the International Monetary System?," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Sep, pages 53-84.
    5. Tobias Knedlik & Johannes Ströbel, 2006. "The role of banking portfolios in the transmission from currency crises to banking crises - potential effects of Basel II," IWH Discussion Papers, Halle Institute for Economic Research 21, Halle Institute for Economic Research.

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