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

51 Pages Posted: 11 Aug 2009

See all articles by Robert Dekle

Robert Dekle

University of Southern California - Department of Economics

Kenneth M. Kletzer

University of California at Santa Cruz; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Multiple version iconThere are 4 versions of this paper

Date Written: May 2001

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: Bank regulations, Asia, Financial crisis, Exchange rate regimes, Capital inflows, Economic models

Suggested Citation

Dekle, Robert and Kletzer, Kenneth M., Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia (May 2001). IMF Working Papers, Vol. , pp. 1-50, 2001. Available at SSRN: https://ssrn.com/abstract=1446186

Robert Dekle (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-8335 (Phone)

Kenneth M. Kletzer

University of California at Santa Cruz ( email )

Santa Cruz, CA 95064
United States
(408) 459-3407 (Phone)
(408) 459-5000 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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