The Political Economy of Distress in East Asian Financial Institutions
Politics and regulatory capture can play an important role in financial institutions distress. East Asia's financial crisis featured many distressed and closed financial intermediaries in an environment with many links between government, poli...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/01/439056/political-economy-distress-east-asian-financial-institutions http://hdl.handle.net/10986/22263 |
| Summary: | Politics and regulatory capture can play
an important role in financial institutions distress. East
Asia's financial crisis featured many distressed and closed
financial intermediaries in an environment with many links
between government, politicians, supervisors, and financial
institutions. This makes the East Asian financial crisis a
good event for studying how such connections affect the
resolution of financial institutions distress. The authors
investigate distress and closure decisions for 186 banks and
97 non-bank financial institutions in Indonesia, the
Republic of Korea, Malaysia, the Philippines, and Thailand.
They find that after July 1997, 42 percent of the
institutions experienced distress (were closed, merged, or
re-capitalized, or had their operations temporarily
suspended). By July 1999, 13 percent of all institutions in
existence in July 1997 had been closed. Using financial data
for 1996, the authors find that: 1) Traditional CAMEL-type
variables - returns on assets, loan growth, and the ratio of
loan loss reserves to capital, of net interest income to
total income, and of loans to borrowings - help predict
subsequent distress and closure. 2) None of the
foreign-controlled institutions were closed, and foreign
portfolio ownership lowered an institutions probability of
distress. 3) Connections - with industrial groups of
influential families - increased the probability of
distress, suggesting that supervisors had granted
forbearance from regulations. Connections also made closure
more, not less, likely - suggesting that the closure
processes themselves were transparent. 4) But larger
institutions, although more likely to be distressed, were
less likely to be closed, while (smaller) non-bank financial
institutions were more likely to be closed. This suggests a
too big to fail policy. 5) These policies, together with the
fact that resolution processes were late and not necessarily
comprehensive, may have added to the overall uncertainty and
loss of confidence in the East Asian countries, aggravating
the financial crisis. |
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