The Financial Sector and Growth in Emerging Asian Economies

Abstract

This study suggests that Asian emerging-market economies now have financial sectors relatively unlikely to provoke new financial crises, either because of reforms after the late-1990s East Asian financial crisis or because of the dominance of state-owned banks not subject to bank runs. Financial intermediation is found to be surprisingly high and is consistent with higher rates of saving and investment and hence growth in the main economies of the region than in counterparts in Latin America. There are sharply diverging patterns nonetheless (e.g., high foreign ownership of banks in the Republic of Korea versus minimal presence in the People's Republic of China). Differing national structures are identified (bank dominated, portfolio oriented, diversified). Policy recommendations include establishing clear long-term plans to improve efficiency in state-owned banks or reduce their dominance; pursuing bank capitalization targets at least as ambitious as those of Basel III; ensuring adequate regulation of growing nonbank intermediaries; reversing a recent trend toward renewed international financial closure in some economies; and improving legal security of bank regulators in some countries.

Keywords: Financial Sector, Asian Growth

JEL Classification: E44, G21, O16