The Political Economy of Distress in East Asian Financial Institutions
International Monetary Fund (IMF); University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR); Tinbergen Institute; European Corporate Governance Institute (ECGI)
Università di Milano-Bicocca
Maria Assunta Free University
Journal of Financial Services Research, Vol. 19, February 2001
The 1997-1999 East Asian crisis is an interesting case for studying the determinants of distress and closure of financial institutions. Of a sample of 283 financial institutions from Indonesia, Korea, Malaysia, the Philippines, and Thailand, 120 experienced distress, and by July 1999, 38 were closed. We find that traditional, CAMEL-type financial data for 1996 help predict distress and closure. "Connections" - with industrial groups or influential families - increased the likelihood of distress, however, suggesting that supervisors had granted selective prior forbearance from prudential regulations. Since closure was more, not less, likely with connections, the closure processes themselves appear transparent. We also find evidence of "too big to fail" policies.
Keywords: Financial Sector Fragility, Early Warning Systems, East Asian Financial Crisis
JEL Classification: G21, G33, G38Accepted Paper Series
Date posted: October 2, 2001
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