Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence From East Asia

Kenneth Kletzer and Robert Dekle ()

No 2001/063, IMF Working Papers from International Monetary Fund

Abstract: A model of the domestic financial intermediation of foreign capital inflows based on agency costs is developed for studying financial crises in emerging markets. In equilibrium, the banking system becomes progressively more fragile under imperfect prudential regulation and public sector loan guarantees until a crisis occurs with a sudden reversal of capital flows. The crisis evolves endogenously as the banking system becomes increasingly vulnerable through the renegotiation of loans after idiosyncratic firm-specific revenue shocks. The model generates dynamic relationships between foreign capital inflows, domestic investment, corporate debt and equity values in an endogenous growth model. The model's assumptions and implications for the behavior of the economy before and after crisis are compared to the experience of five East Asian economies. The case studies compare three that suffered a crisis or near-crisis, Thailand and Malaysia, to two that did not, Taiwan Province of China and Singapore, and lend support to the model.

Keywords: WP; foreign currency; financial crisis; capital stock; bank loan; banking sector; rate of interest; currency crises; financial fragility; exchange rate regimes; capital inflows; bank portfolio; portfolio choice; open economy; bank management; average equity; narrow money; lending bank; bank disclosure; expected return; adverse selection; opportunity cost; shares rise; Loans; Deposit insurance; Commercial banks; East Asia; Asia and Pacific (search for similar items in EconPapers)
Pages: 50
Date: 2001-05-01
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Citations: View citations in EconPapers (38)

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Chapter: Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia (2002)
Working Paper: Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia (2001)
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