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Domestic Bank Regulation and Financial Crises

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  • Kenneth Kletzer
  • Robert Dekle

Abstract

A model of the domestic financial intermediation of foreign capital inflows based on agency costs is developed for studying financial crises in emerging markets. In equilibrium, the banking system becomes progressively more fragile under imperfect prudential regulation and public sector loan guarantees until a crisis occurs with a sudden reversal of capital flows. The crisis evolves endogenously as the banking system becomes increasingly vulnerable through the renegotiation of loans after idiosyncratic firm-specific revenue shocks. The model generates dynamic relationships between foreign capital inflows, domestic investment, corporate debt and equity values in an endogenous growth model. The model''s assumptions and implications for the behavior of the economy before and after crisis are compared to the experience of five East Asian economies. The case studies compare three that suffered a crisis or near-crisis, Thailand and Malaysia, to two that did not, Taiwan Province of China and Singapore, and lend support to the model.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/63.

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Length: 50
Date of creation: 01 May 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/63

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Keywords: Exchange rate regimes; Capital inflows; Asia; Economic models; banking; foreign capital; foreign capital inflows; deposit insurance; capital stock; bank lending; banking sector; capital inflow; banking system; stock market; bank portfolios; foreign exchange; bank deposits; bank borrowing; domestic credit; capital flows; banking crisis; capital accumulation; prudential regulation; capital markets; bank of thailand; international capital flows; present value; moral hazard; equity financing; bank loans; bank stocks; loan classification; banker; capital controls; bankrupt; bank debt; international capital; bank reserves; bank of korea; bank insolvencies; banking model; gross domestic product; equity ratio; banking systems; bank runs; bankers; bank liabilities; bank loan; bank equity; bank equities; equity investment; banking crises; capital market; capital losses; corporate bonds; bank financing; speculative attack; connected lending; domestic borrowing; bank debts; monetary authority; bank deposit; international capital inflows; bank regulation; bank negara malaysia; bank management; liquid asset; foreign capital flows; deposit insurance scheme; bank guarantees; floating exchange rate regime; speculative attacks; bank regulations; banking system stability; merchant bank; retained earnings; bank bailouts; bank shares; global capital market; equity shares; bank supervision; capital productivity; investor confidence; bank safety net; return on investment; credit market; bank policy; liquidity crisis; hedging; reserve ratio; bank credit; crisis prevention; return on assets; borrowing cost; current account deficit; bank stability; systemic banking crisis; bank failures; bank safety; capital increases; forward contracts; strong capital inflow; bank fragility; bank deposit guarantees; net capital; bank supervisors; securities market; bank assets; bank borrowers;

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References

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