Chapter

Domestic Bank Regulation and Financial Crises Theory and Empirical Evidence from East Asia

Edited by Robert Dekle and Kenneth Kletzer

in Preventing Currency Crises in Emerging Markets

Published by University of Chicago Press

Published in print November 2002 | ISBN: 9780226184944
Published online February 2013 | e-ISBN: 9780226185057 | DOI: http://dx.doi.org/10.7208/chicago/9780226185057.003.0012
Domestic Bank Regulation and Financial Crises Theory and Empirical Evidence from East Asia

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This chapter covers the banking relationships that have been shown in the Asian financial system. It concentrates on the link between foreign capital inflows, economic growth, and subsequent banking crises under a fixed exchange rate. Malaysian, Taiwanese, and Singaporean firms were not dependent on domestic banks, because they actively tapped bond and equity markets. The theoretical model demonstrates that banking and currency crises coincide and inevitably occur in the absence of effective prudential regulation. After a financial crisis, the model shows that output contracts and that the growth rate of output is lower in recovery than it was before the crisis. Korea and Thailand had the strongest link between capital flows and lending, whereas capital controls broke the strong connection in Malaysia in 1994. The link between foreign capital inflows and bank lending fits Malaysia except under the imposition of capital controls; this supports the model's implications.

Keywords: banking; Asian financial system; foreign capital inflows; economic growth; Malaysia; Taiwan; Singapore; Korea; Thailand; bank lending

Chapter.  20591 words.  Illustrated.

Subjects: International Economics

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