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Financial Restructuring after the 1997 Crisis and Impact of the Lehman Shock: Path Dependence of Financial Systems in Korea and Thailand

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  • Okabe, Yasunobu
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    Abstract

    After the 1997 Asian financial crisis, South Korea (Korea) and Thailand implemented financial restructuring in a similarly successful manner and regained the healthiness of their banking sectors. However, when the Lehman shock hit their financial markets in 2008, its impact on the two countries was quite different. Korea, which had performed better in the financial restructuring than Thailand, was driven to the brink of a second financial crisis in 2008 while Thailand weathered the shock easily. This paper addresses this paradoxical contrast from the path dependence perspective, focusing on different historical paths of formation and change of the respective financial systems. It concludes that the successful state-led financial restructuring in Korea fostered banks’ propensity of active lending while the private sector-led reform in Thailand only reinforced banks’ conservative lending behavior. Furthermore, betraying the critical juncture theory, the severe economic crises helped reinforce the institutional legacies in the two countries, resulting in aggressive foreign borrowing by Korean banks and timid borrowing by Thai banks. These differences explain their contrasting vulnerability to the Lehman shock.

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    File URL: http://hdl.handle.net/10685/84
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    File URL: http://repository.ri.jica.go.jp/dspace/bitstream/10685/84/1/JICA-RI_WP_No.51_2013.pdf
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    Bibliographic Info

    Paper provided by JICA Research Institute in its series Working Papers with number 51.

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    Date of creation: 09 Jan 2013
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    Handle: RePEc:jic:wpaper:51

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    Keywords: financial crisis ; path dependence ; institutional legacy ; financial system ; Korea ; Thailand;

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    1. Kevin Hewison, 2005. "Neo-liberalism and Domestic Capital: The Political Outcomes of the Economic Crisis in Thailand," Journal of Development Studies, Taylor & Francis Journals, vol. 41(2), pages 310-330.
    2. Stijn Claessens & Daniela Klingebiel & Luc Laeven, 2001. "Financial Restructuring in Banking and Corporate Sector Crises: What Policies to Pursue?," NBER Working Papers 8386, National Bureau of Economic Research, Inc.
    3. Swati R. Ghosh, 2006. "East Asian Finance : The Road to Robust Markets," World Bank Publications, The World Bank, number 7063, August.
    4. Honohan, Patrick & Klingebiel, Daniela, 2000. "Controlling the fiscal costs of banking crises," Policy Research Working Paper Series 2441, The World Bank.
    5. Kyu-Sung Lee, 2011. "The Korean Financial Crisis of 1997 : Onset, Turnaround, and Thereafter," World Bank Publications, The World Bank, number 2280, August.
    6. Patrick Honohan & Daniela Klingebiel, 2000. "Controlling fiscal costs of banking crises," Proceedings 682, Federal Reserve Bank of Chicago.
    7. Shirai, Sayuri, 2009. "The Impact of the US Subprime Mortgage Crisis on the World and East Asia," MPRA Paper 14722, University Library of Munich, Germany.
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