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Does Short-Term Debt Increase Vulnerability to Crisis? Evidence from the East Asian Financial Crisis

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  • Efraim Benmelech
  • Eyal Dvir

Abstract

Does short-term debt increase vulnerability to financial crisis, or does short-term debt reflect -- rather than cause -- the incipient crisis? We study the role that short-term debt played in the collapse of the East Asian financial sector in 1997-1998. We alleviate concerns about the endogeneity of short-term debt by using long-term debt obligations that matured during the crisis. We find that debt obligations issued at least three years before the crisis had a negative, albeit sometimes insignificant, effect on the probability of failure. Our results are consistent with the view that short-term debt reflects, rather than causes, distress in financial institutions.

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  • Efraim Benmelech & Eyal Dvir, 2011. "Does Short-Term Debt Increase Vulnerability to Crisis? Evidence from the East Asian Financial Crisis," NBER Working Papers 17468, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17468
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    19. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 1. Drivers of Systemic Banking Crises: The Role of Bank-Balance-Sheet Contagion and Financial Account Structure," OECD Economics Department Working Papers 902, OECD Publishing.
    20. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    21. Gianni La Cava, 2013. "Inventory Investment in Australia and the Global Financial Crisis," RBA Research Discussion Papers rdp2013-13, Reserve Bank of Australia.
    22. Olivier Mesly & David W. Shanafelt & Nicolas Huck, 2020. "Dysfunctional markets: A spray of prey perspective," Working Papers of BETA 2020-34, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    23. Richard J. Nugent, 2019. "Restrictions on Short-Term Capital Inflows and the Response of Direct Investment," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 45(3), pages 350-383, June.
    24. Ahrend, Rudiger & Goujard, Antoine, 2015. "Global banking, global crises? The role of the bank balance-sheet channel for the transmission of financial crises," European Economic Review, Elsevier, vol. 80(C), pages 253-279.

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    More about this item

    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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