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The Role of State Intervention in the Financial Sector : Crisis Prevention, Containment, and Resolution

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  • Yoon Je Cho

    (Asian Development Bank Institute)

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    Abstract

    This paper discusses the role of state intervention for prevention, containment, and resolution of financial crises based mainly on the Korean experience during the 1997 Asian financial crisis. Crises in emerging market and developing economies tend to be more complicated than those faced by advanced economies because they are twin crises : financial and currency crises. Such crises require the development of a comprehensive strategy covering the stabilization of the domestic financial market and the foreign exchange market, closely coordinated responses by different government bodies, an extraordinary effort for financial restructuring, and the introduction of a new regulatory framework. This effort should be based on an effective crisis management team of experts given a clear mandate with well defined power; strong political support; effective communication with the market players, both domestic and foreign; and sufficient mobilization of public funds. In this regard, this paper emphasizes the importance of building a reliable information base, prompt actions, orchestrating political consensus, and a balanced approach to restructuring and regulation among different types of financial institutions. The paper also highlights the need for a new international financial architecture matching the rapid integration into the global market of the financial markets of emerging and developing economies while their currency remains non-convertible.

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    Bibliographic Info

    Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 23013.

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    Date of creation: Jan 2010
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    Handle: RePEc:eab:financ:23013

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    Related research

    Keywords: financial crisis; Korea; state intervention; crisis management; financial regulation;

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    References

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    1. Katrin Assenmacher-Wesche & Stefan Gerlach, 2008. "Ensuring financial stability: financial structure and the impact of monetary policy on asset prices," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 361, Institute for Empirical Research in Economics - University of Zurich.
    2. Asl? Demirgüç-Kunt & Edward J. Kane & Luc Laeven (ed.), 2008. "Deposit Insurance around the World: Issues of Design and Implementation," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262042541, December.
    3. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers, National Bureau of Economic Research, Inc 8970, National Bureau of Economic Research, Inc.
    4. Caprio, Gerard & Honohan, Patrick, 2001. "Finance for Growth: Policy Choices in a Volatile World," MPRA Paper, University Library of Munich, Germany 9929, University Library of Munich, Germany.
    5. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 77-128.
    6. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, Elsevier, vol. 19(1-2), pages 1-24.
    7. Fry, Maxwell J, 1989. "Financial Development: Theories and Recent Experience," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 5(4), pages 13-28, Winter.
    8. Demirguc-Kunt, Asl' & Kane, Edward J., 2001. "Depositinsurance around the globe : where does it work?," Policy Research Working Paper Series, The World Bank 2679, The World Bank.
    9. Cho, Yoon Je, 1988. "The effect of financial liberalization on the efficiency of credit allocation : Some evidence from Korea," Journal of Development Economics, Elsevier, Elsevier, vol. 29(1), pages 101-110, July.
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    Cited by:
    1. Peter J. Morgan & Mario Lamberte, 2012. "Strengthening Financial Infrastructure," Finance Working Papers, East Asian Bureau of Economic Research 23191, East Asian Bureau of Economic Research.

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