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Does short-term debt increase vulnerability to crisis? Evidence from the East Asian financial crisis

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  • Eyal Dvir
  • Efraim Benmelech

Abstract

Does short-term debt increase vulnerability to financial crisis, or does causality go the other way, so that short term debt reflects rather than causes the incipient crisis? We approach this question empirically by examining the banking sector in five East Asian economies that were affected by the financial crisis of 1997-8. We put together a firm-level database that includes information on banks’ debt obligations as well as on bank failures following the crisis. We deal with potential endogeneity of short term debt by using certain long term debt obligations instead. These are debt obligations that mature at the time of the crisis, and therefore add to the bank’s vulnerability, but since they were contracted many years previously, cannot be mistaken as an endogenous response to changing conditions or expectations in the period immediately before the crisis. We find that such debt obligations that were contracted four years or more before the crisis have a negative, albeit sometimes insignificant effect on the probability of failure. Our results are therefore consistent with an interpretation of short-term debt as reflecting, rather than causing, distress in the banking sector. However, our findings do not rule out the hypothesis that exposure to roll-over risk contributed to bank failure in the East Asian crisis.

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  • Eyal Dvir & Efraim Benmelech, 2010. "Does short-term debt increase vulnerability to crisis? Evidence from the East Asian financial crisis," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.
  • Handle: RePEc:fip:fedfpr:y:2010:i:oct:x:1
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    2. Layal Mansour, 2013. "International Reserves versus External Debts : Can International reserves avoid future Financial Crisis in indebted Countries ?," Working Papers 1329, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    3. repec:kap:openec:v:28:y:2017:i:3:d:10.1007_s11079-016-9418-8 is not listed on IDEAS
    4. Steiner, Andreas, 2014. "Reserve accumulation and financial crises: From individual protection to systemic risk," European Economic Review, Elsevier, vol. 70(C), pages 126-144.
    5. Bartoli, Francesca & Ferri, Giovanni & Murro, Pierluigi & Rotondi, Zeno, 2013. "Bank–firm relations and the role of Mutual Guarantee Institutions at the peak of the crisis," Journal of Financial Stability, Elsevier, vol. 9(1), pages 90-104.
    6. Kyunghun Kim & Ju Hyun Pyun & Jiyoun An, 2017. "Does Credit Market Integration Amplify the Transmission of Real Business Cycle During Financial Crisis?," 2017 Meeting Papers 1236, Society for Economic Dynamics.
    7. Emanuele Brancati & Marco Macchiavelli, 2016. "Endogenous Debt Maturity and Rollover Risk," Finance and Economics Discussion Series 2016-074, Board of Governors of the Federal Reserve System (U.S.).
    8. repec:eee:inecon:v:108:y:2017:i:c:p:191-210 is not listed on IDEAS
    9. Qian, Xingwang & Steiner, Andreas, 2017. "International reserves and the maturity of external debt," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 399-418.
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    12. Layal Mansour, 2013. "International Reserves versus External Debts : Can International reserves avoid future Financial Crisis in indebted Countries ?," Working Papers halshs-00864899, HAL.
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    17. Gianni La Cava, 2013. "Inventory Investment in Australia and the Global Financial Crisis," RBA Research Discussion Papers rdp2013-13, Reserve Bank of Australia.
    18. Xingwang Qian & Andreas Steiner, 2016. "International Reserves, External Debt Maturity, and the Reinforcement Effect for Financial Stability," ifo Working Paper Series 211, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
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    More about this item

    Keywords

    Financial crises - Asia;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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