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Is there a credit crunch in East Asia?

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Author Info
Wei Ding
Domac, Ilker
Ferri, Giovanni

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Abstract

The issue of the credit crunch in the aftermath of the Asian crisis has stimulated much debate. Indeed, some features of the East Asian economies, such as bank-based financial systems and high leverage, make them particularly vulnerable to monetary and financial shocks. Under such circumstances, the credit channel of transmission of these shocks is likely to lead to a credit crunch, affecting the flow of bank loans to those agents--households and small and medium-sized enterprises--for whom close substitutes for bank credit are unavailable. In turn, the disruption to the availability of finance for bank-dependent borrowers may stymie economic activity. In practice, however, it is difficult to detect the credit channel effects that lead to a credit crunch. Reliance on trends of credit aggregates alone is inadequate to prove that there has been an adverse shift in the supply of loans: even a decline or slowdown of credit could stem from a decrease or deceleration in demand. A frequently used methodology to overcome this problem focuses on both credit aggregates and the yield spread between bank loans and risk-free assets, such as government bonds. If this spread rises while credit aggregates slow down, one can conjecture that the supply of loans has either decreased more or increased less than demand. But further qualification is needed. The increase of the spread might simply reflect a rising risk premium triggered by the fact that the negative shock reduces the net worth of economic agents because of larger financial outlays. Accordingly, the relevant spread to capture the worsening credit conditions that affect bank-dependent borrowers is the spread between bank lending rates and corporate bonds. The yield spread corporate and government bonds measures the general risk premium. The study applies this methodology to Indonesia, Malaysia, the Philippines, the Republic of Korea, and Thailand, and shows that the credit crunch is widespread, while its negative impact particularly affects small banks and enterprises. On the basis of the findings, the authors claim that 1) a protracted and heavy reliance on tight monetary policy, entailing high real interest rates, appears inappropriate for restoring market confidence; 2) it is desirable to consider alternative policy instruments that do not place further stress on the banking sector and on its lending to the corporate sector; and 3) policy actions are warranted to alleviate the strain that the crisis has put on small banks and enterprises.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1959.

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Date of creation: 31 Aug 1998
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Handle: RePEc:wbk:wbrwps:1959

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Related research
Keywords: Economic Theory&Research; Payment Systems&Infrastructure; Banks&Banking Reform; Financial Intermediation; International Terrorism&Counterterrorism; Environmental Economics&Policies; Financial Crisis Management&Restructuring; Banks&Banking Reform; Financial Intermediation; Economic Theory&Research;

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  1. R. Glenn Hubbard, 1995. "Is there a "credit channel" for monetary policy?," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 63-77. [Downloadable!]
  2. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  3. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Bruce C. Greenwald & Joseph E. Stiglitz, 1993. "Financial Market Imperfections and Business Cycles," NBER Working Papers 2494, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Gertler, M. & Gilchrist, S., 1992. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 92-08, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  6. Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Chapters, in: Financial Markets and Financial Crises, pages 69-108 National Bureau of Economic Research, Inc. [Downloadable!]
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  7. Lang, William W. & Nakamura, Leonard I., 1995. "'Flight to quality' in banking and economic activity," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 145-164, August. [Downloadable!] (restricted)
  8. Anil K Kashyap & Jeremy C. Stein, 1997. "What Do a Million Banks Have to Say About the Transmission of Monetary Policy?," NBER Working Papers 6056, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Ben S. Bernanke & Alan S. Blinder, 1989. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March. [Downloadable!] (restricted)
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  11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bongini, Paola & Claessens, Stijn & Ferri, Giovanni, 2000. "The political economy of distress in East Asian financial institutions," Policy Research Working Paper Series 2265, The World Bank. [Downloadable!]
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  2. Torsten Schmidt & Hiltrud Nehls, 2003. "Credit Crunch in Germany?," RWI Discussion Papers 0006, Rheinisch-Westfälisches Institut für Wirtschaftsforschung. [Downloadable!]
  3. Mody, Ashoka & Taylor, Mark P, 2003. "International Capital Crunches: The Time-Varying Role of Informational Asymmetries," CEPR Discussion Papers 3757, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Lamberte, Mario B., 1999. "A Second Look at Credit Crunch: The Philippine Case," Discussion Papers DP 1999-23, Philippine Institute for Development Studies. [Downloadable!]
  5. Haryo Aswicahyono & Dionisius Narjoko & Hal Hill, 2008. "Industrialization after a Deep Economic Crisis: Indonesia," Departmental Working Papers 2008-18, Australian National University, Economics RSPAS. [Downloadable!]
  6. Antonio Forte & Giovanni Pesce, 2009. "The International Financial Crisis: an Expert Survey," series 0024, Dipartimento di Scienze Economiche - Università di Bari, revised Apr 2009. [Downloadable!]
  7. Laeven, Luc & Klingebiel, Daniela & Kroszner, Randy, 2002. "Financial crises, financial dependence, and industry growth," Policy Research Working Paper Series 2855, The World Bank. [Downloadable!]
  8. Demirguc-Kunt, Asli & Detragiache, Enrica & Gupta, Poonam, 2000. "Inside the crisis : an empirical analysis of banking systems in distress," Policy Research Working Paper Series 2431, The World Bank. [Downloadable!]
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