Bank Restructuring in Post-Crisis Asia

We assess the quantitative effects in Asia of the 1997-1998 banking crisis at both the macroeconomic and bank levels, comparing our findings to broader studies of banking crises. Asia's crisis was both more severe and more costly than others, but with little evidence of lasting bank runs. We than assess the nature of reforms within a structure that organizes measures between those designed to address externalities or market structure, those treating information asymmetries and those addressing legal infrastructure. We compare these measures to results from Barth, Caprio and Levine on the effects of banking structure and regulation on financial development, finding that reforms to date have under emphasized private monitoring and have concentrated too many assets in state-owned institutions. Despite extensive efforts at broadening legal infrastructure, progress has been poor, especially in Indonesia and Thailand.

Introduction Almost four years have passed since much of Asia erupted into financial turmoil sparked by Thailand's July 2 devaluation. The turmoil and contagion of that event has in turn sparked a host of papers seeking to understand the nature of the crisis. Authors have put forward a variety of alternative explanations. Some have seen the crisis as the result of excessive short-term capital inflows in the face of liberalization that drove real exchange rates out of line and increased fragility so that panic set in after Thailand's devaluation1. Others have seen the crisis as the result of moral hazard created by an implicit or explicit backing of financial institution deposits in the face of poor lending decisions prompted by a poorly regulated system plagued by adverse selection.download