Financial Liberalization in Emerging Markets: How Does Bank Lending Change?
23 Pages Posted: 26 Feb 2008
Financial liberalization has often failed in the past due to underestimated problems of structural change. We analyze such changes in lending behavior of Thai commercial banks during a liberalization phase by way of unique micro data. Liberalization has expected positive effects, such as lowering the interest rate spread and collateral requirements. Liberalization causes structural change, such as a decline in collateral-based and relationship banking. However, the liberalization evidence is consistent with more risk taking, such as lending to more risky projects and less protection against default. The Thai experience suggests obvious policy lessons.
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