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

Authors
Disciplines
  • Economics
  • Political Science

Abstract

Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: Preventing Currency Crises in Emerging Markets Volume Author/Editor: Sebastian Edwards and Jeffrey A. Frankel, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-18494-3 Volume URL: http://www.nber.org/books/edwa02-2 Conference Date: January 2001 Publication Date: January 2002 Title: Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia Author: Robert Dekle, Kenneth Kletzer URL: http://www.nber.org/chapters/c10643 507 11.1 Introduction The financial crises in East Asia followed several years of large foreign fi- nancial capital inflows intermediated by the domestic banking system. The crisis countries suffered tandem banking and currency crises that produced sharp reductions in economic growth and subsequent ongoing domestic fi- nancial distress. In some cases, it was clear beforehand that the domestic financial system was becoming increasingly fragile and crisis-prone—for example, in Thailand. The currency crisis made matters worse due to the uncovered foreign currency exposure of the banking system. A number of authors have also argued that implicit government guarantees of foreign currency liabilities of the domestic banks contributed to the financial crisis in Asia. More generally, Calvo (1998a) observes that emerging-market fi- nancial crises evolve through complicated interactions between domestic fi- nancial sectors, international lenders, and national monetary and fiscal au- thorities. Our paper considers the dynamic consequences of interactions between the microeconomics of private financial intermediation and public-sector financial and macroeconomic policies in a currency crisis model. We focus on the relationship between foreign capital inflows, eco- 11 Domestic Bank Regulation and Financial Cr

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