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Capital Movements, Banking Insolvency, and Silent Runs in the Asian Financial Crisis

  • Edward J. Kane

This paper supplies an agency-cost and contestable-markets perspective on the financial policies that triggered the Asian financial crisis. The agency-cost analysis hypothesizes that individual-country regulators knew that politically directed loans had made their banks insolvent, but purposefully gambled that deregulation could allow the insolvent banks to grow their way out of trouble. The contestable-markets paradigm sets this gamble in the context of offshore innovations in financial technology and regulatory systems that made it progressively easier for worried Asian citizens to move funds to foreign institutions. These perspectives portray the simultaneous breakdown of repressive financial systems as a technology-led victory of market forces over longstanding government efforts to wall out foreign financial competition.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7514.

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Date of creation: Jan 2000
Date of revision:
Publication status: published as Kane, Edward J., 2000. "Capital movements, banking insolvency, and silent runs in the Asian financial crisis," Pacific-Basin Finance Journal, Elsevier, vol. 8(2), pages 153-175, May.
Handle: RePEc:nbr:nberwo:7514
Note: CF
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  1. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  2. Martin Mayer, 1998. "The Asian Disease: Plausible Diagnoses, Possible Remedies," Economics Working Paper Archive wp_232, Levy Economics Institute.
  3. Edward J. Kane, 1998. "Capital Movements, Asset Values, and Banking Policy in Globalized Markets," NBER Working Papers 6633, National Bureau of Economic Research, Inc.
  4. Michael P. Dooley, 1997. "A Model of Crises in Emerging Markets," NBER Working Papers 6300, National Bureau of Economic Research, Inc.
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  6. Sebastian Edwards, 1999. "Crisis Prevention: Lessons from Mexico and East Asia," NBER Working Papers 7233, National Bureau of Economic Research, Inc.
  7. Claessens, Stijn & Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "How does foreign entry affect the domestic banking market?," Policy Research Working Paper Series 1918, The World Bank.
  8. Velasco, A. & Chang, R., 1998. "The Asian Liquidity Crisis," Working Papers 98-27, C.V. Starr Center for Applied Economics, New York University.
  9. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
  10. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
  11. Kane Edward J., 1993. "What Lessons Should Japan Learn from the U.S. Deposit-Insurance Mess?," Journal of the Japanese and International Economies, Elsevier, vol. 7(4), pages 329-355, December.
  12. Larry Wall & Robert Eisenbeis, 1999. "Financial Regulatory Structure and the Resolution of Conflicting Goals," Journal of Financial Services Research, Springer, vol. 16(2), pages 223-245, December.
  13. Richard J. Herring & Susan Wachter, 1999. "Real Estate Booms and Banking Busts: An International Perspective," Center for Financial Institutions Working Papers 99-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
  14. Riccardo De Bonis & Alessandro Giustiniani & Giorgio Gomel, 1999. "Crises and Bail Outs of Banks and Countries: Linkages, Analogies, and Differences," The World Economy, Wiley Blackwell, vol. 22(1), pages 55-86, 01.
  15. Demirguc-Kent, Asli & Detragiache, Enrica, 1998. "Financial liberalization and financial fragility," Policy Research Working Paper Series 1917, The World Bank.
  16. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
  17. Jianping Mei, 1999. "Political Risk, Financial Crisis, and Market Volatility," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-049, New York University, Leonard N. Stern School of Business-.
  18. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
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