The Global Financial Crisis Revisited: Competition and Regulation

Abstract

Using data of the systematic banking crises from 1981 to 2008, we examine how competition and regulation are related to the crises. We find that countries with higher concentration and/or higher market power of the banking industry are less prone to crises. Further, they are more likely to have weathered the 2008 global financial crisis. However, regulatory and institutional factors play little role and the estimation results are shown to be sensitive to measures of the degree of competition or severity of the crisis, as well as the coverage of the crises.     

Performance of Domestic and Foreign Banks: The Case of Korea and the Asian Financial Crisis

Abstract

This paper examines the performance of banks, domestic and foreign, in Korea before and after the Asian financial crisis, examining how the profitability of those banks differed and identifying factors that explain why those differences existed. The performance of Korean banks deteriorated dramatically in 1998 with most banks recovering somewhat in 1999. Foreign banks did not experience the same negative effect on their performance as a rule. Overall, the domestic Korean banks suffered more severely from the Asian financial crisis than foreign banks. Several possible explanations exist. First, foreign banks, unlike domestic Korean banks, were not subject to credit allocation directives from the Korean government to selected, favoured industries. Second, foreign banks, since they relied for governance on the mother bank in the home country, achieved higher efficiency and better asset and liability management. Finally, foreign banks rely more heavily on fee-for-service income rather than loan revenue.     

Financial Market Volatility and International Reserve Holding Behaviour: A Case Study for Korea,Indonesia, the Philippines,and Thailand

Abstract

The effects of financial market volatility on the international reserve holding behaviour of four Asian countries that experienced the financial crisis in 1997—Korea, Indonesia, the Philippines, and Thailand are investigated. The financial market volatility is modelled and the effect on reserve dynamics, reserve accumulation, and reserve volatility is estimated. Estimations are taken for two periods—pre- and post-crisis—and the structural break test is performed to examine the change in the effects on reserve holding behaviour. The empirical results, in general, support the evidence for the structural change in the effects on reserve holding behaviour after the crisis. This would be one of the evidences of the precautionary motive for reserve holdings after the crisis.     

CORPORATE DEBT RESOLUTION AND THE ROLE OF FOREIGN CAPITAL IN THE POST‐CRISIS RESTRUCTURING OF THE REPUBLIC OF KOREA

The outbreak of the financial crisis in the Republic of Korea in 1997 exposed the structural weaknesses in the country's economy. Heated debates have failed to generate definitive answers on just what caused the financial crisis. Considering the importance of restructuring the corporate sector, this paper analyzed how the resolution of corporate debts was accomplished and examined the role of foreign capital in Korea's post‐crisis corporate restructuring. Special attention was given to the measures devised to recover nonperforming loans for the liquidation of corporate debts, to the foreign capital inflows through cross‐border M&As or privatization processes, and to the changes in control through corporate governance reforms. This paper concluded that the resolution of corporate debts has been satisfactory and successful and that foreign capital contributed significantly to effective corporate restructuring and debt resolution in the post‐crisis restructuring of Korea.     

A Case for Economic Capital as a Pillar 1 Regulatory Tool

Regulatory capital – as a tool for financial regulation – has come under scrutiny following the financial crisis of 2007‐2010 in terms of its ability to achieve the major objectives of financial regulations, namely contributing to financial stability; the provision of equally competitive regulatory conditions for financial institutions; and aiming to ensure that regulatory capital requirements are risk‐sensitive. This article investigates and compares the risk‐sensitivity of economic capital and regulatory capital requirements empirically from a systemic and institution‐specific perspective. The results are assessed to determine whether current regulatory capital requirements are representative of the relevant risks financial institutions face. Given these results as well as calls to strengthen Basel's Pillar 2 disciplines in the aftermath of the crisis, it also presents a case for regulators to place a heavier reliance on economic capital – rather than regulatory capital numbers.     

Not All Financial Crises Are Alike!

The United States has experienced many financial crises, but the Great Depression, the prolonged thrift crisis of the 1980s, and the most recent Great Recession stand out. In this paper, the focus is on the differences the three crises exhibited in terms of the economic environment leading up to each crisis, the effects on financial institutions and financial markets, and the policy responses and how those responses evolved. The post-World War I macro environment leading up to the Great Depression was radically different than either the inflation environment of the 1970s and early 1980s or the housing collapse and role that subprime lending played in the Great Recession. Additionally, the financial institution failure experience was different in all three crises, as were the regulatory and legislative responses that followed. Perhaps most striking are two important differences. In the Great Depression, many very small rural banks failed. In the 1980s, the first round of failures hit mainly thrifts followed by largely smaller regional and community banks. In the Great Recession, the nation’s largest institutions were the main ones affected. Second, the runs on the institutions were also significantly different.     

The Financial Crisis: Miss-Diagnosis and Reactionary Responses

This paper divides the current financial crisis into three phases and describes the policy responses to each. In Phase I policy makers misdiagnosed it as a traditional liquidity crisis. Phase II was a triage period as policy makers addressed the significant solvency problems that became apparent in the country’s largest financial institutions. Phase III was the pronounced slowdown in the real U.S. economy during which the Federal Reserve expanded its balance sheet by purchasing long term Treasuries and newly issued mortgage backed securities from GSEs. This paper describes the financial market conditions that characterized each of the three phases, describes the policy responses, and finally, attempts to sort out what we have learned and not learned from this crisis and how to handle it so far.     

Competition in Turkish Banking: Impacts of Restructuring and the Global Financial Crisis

This paper investigates the evolution of competition in the Turkish banking industry by taking into account the transformation in the sector in the aftermath of the country's financial crisis of 2000 to 2001 and the global financial crisis. The results demonstrate that the level of competition in the system did not increase despite the restructuring that was undertaken and the increased foreign bank participation. In addition, the level of competition in the sector deteriorated during the global crisis. There is also some evidence that the market power of banks with different ownership characteristics varied and did not converge over time.     

Financial Globalization and Banking Crises in Emerging Markets

Bank crises in emerging economies have been a feature of the recent global crisis, and their incidence has increased in the post-Bretton Woods era. This paper investigates the impact of financial globalization on the incidence of systemic bank crises in 20 emerging markets over the years 1976–2002 using measures of de facto and de jure financial openness. An increase in foreign debt liabilities contributes to an increase in the incidence of crises, but foreign direct investment and portfolio equity liabilities have the opposite effect. A more liberal de jure capital regime lowers the incidence of banking crises, while a regime of fixed exchange rates increases their frequency. The results of the econometric analysis is consistent with the experience of East European and central Asian emerging markets, which attracted a relatively large proportion of capital flows in the form of debt in recent years and have been particularly hard hit by the global financial crisis.     

Sluggish Recovery from the Financial Crisis: Crowding-out Effect and Contagion

Abstract

The stimulus plans by the US Government after the financial crisis in 2008 may decrease private investment by means of a crowding-out effect. The US Federal Reserve utilized quantitative easing policies to maintain the interest rate as low as possible to minimize crowding-out. The 2008 financial crisis also affects other economies through contagion effects. This paper investigates the existence of the crowding-out effect and contagion effect after the crisis using Temin and Voth's models. The empirical results from vector autoregession show that there is a crowding-out effect in the US economy as well as a contagion effect of the crisis on the Korean and Japanese economies.     

金融危机的教训及应对措施

2008年的国际金融危机,任何国家都难置身其外。对于正处在对外扩大开放中的我国金融市场来说,分析并吸取金融危机的教训,对规范金融市场要素及实施各种要素的整合具有重要意义。     

The Korean Economy in Transition: In Search for a New Model

Abstract

Prior to the 1997 financial crisis, the Korean economy had based its growth policies on East Asia's economic catch-up model which was based mainly on the Japanese development experience. However, the events that lead to the 1997 crisis and the changes instituted in the Korean economy after the crisis have put to question whether the traditional East Asian growth model will continue to be viable. This paper examines two alternative models of development, namely the “Anglo-Saxon” and the “Continental European” models, and evaluates their relevance for Korea's future development challenges. Despite many common features these models share, they are also quite distinctive with regard to their treatment of the labor market system and the role of government. By focusing on the model's capacity to expand employment and to provide sustainable growth as the most important criteria, it is suggested that Korea should follow the “Anglo-Saxon model”, at least in the short- to medium-term. In comparing Korea's economy with other advanced economies when they were at the similar stage of development, it is found that Korea's growth potential lags behind that of countries such as Japan, Germany, Finland, and Ireland. The efficiency of Korea's investment is found to be only slightly better than Japan while it is inferior to all other advanced economies. Despite these challenges, Korea is apparently moving toward the “Continental European model”, with the Korean government increasing its own size and plans for further expenditures on social security and welfare. However, in order to ensure sustainable development with significant job creation, this paper argues that Korea should switch its direction and adopt the “Anglo-Saxon model” as soon as possible.     

Transmission of Stock Prices and Volatility from the Influential Major Markets on the Emerging Market: A Case Study of the Korean Stock Market

Abstract

This study investigates how the 1997 crisis has changed the Korean market by focusing on price and volatility spillovers from the US, Chinese, and Japanese markets. Using the exponential general autoregressive conditional heteroskedastic (EGARCH) model, new information on stock prices originating in the US market was transmitted to the Korean market for all periods. The price spillover effect from the Japanese market to the Korean market became stronger from the crisis period. Asymmetry in the spillover effect on market volatility was more pronounced in the Korean market after the financial crisis.     

Building an Entrepreneurial Economy: The Case of Korea 1998–2005

Abstract

This paper examines how entrepreneurship takes place in an economy where traditional structural settings are not favorable to entrepreneurial activities. Specifically, it investigates the case of Korea during 1998–2005, when the national economy experienced fairly dramatic upsurge of start-ups and related changes. The paper argues that a national economy may achieve significant structural changes when diverse conditions are in place, including not only intentional efforts, e.g. governmental policies, but factors of serendipity triggering potential disruption to the economy, e.g. an external shock such as the Asian financial crisis in 1997. During the observation period, Korea went through notable changes in terms of entrepreneurship. Although limited, the Korean economy looks at possibilities of having small and medium-sized companies co-evolve with large ones such as chaebols.     

Interaction between Foreign and Domestic Investors in the Korean Stock and Futures Markets*

The present paper analyzes the behavioral relations of major investor groups in the stabilized Korean stock and futures markets after the 1997 Asian financial crisis. Investor groups cannot be classified as positive or negative feedback traders on market returns when both stock and futures markets are considered, which is inconsistent with the results in Ghysels and Seon (2005). Foreign investors and domestic institutions tend to take opposite positions in both markets. The impact of foreign investors on the basis change is significantly negative in the futures market, whereas domestic institutions have a negative relation in the stock market. This supports the view that selling activity of foreign investors in the futures market pulls the futures price down compared with the index value and, consequently, induces the reverse cash‐and‐carry trade of domestic institutions. This relationship, which negatively influenced the Korean economy during the crisis, as shown in Ghysels and Seon (2005), still exists in the Korean financial markets.     

Occupational Mobility Pattern in Chonju,Korea

This paper investigates the existence of the inter‐dependence between the Indian stock market and Asia's emerging markets since 1990. This study analyzes whether the MSCI Asian Index has significantly influenced the Bombay Stock Exchange Index before, during, and after the Asian financial crisis. To address this issue, the author first uses a rolling correlation, and conduct uni‐directional and bi‐directional causality tests using the Granger causality test. He then examines the impulse response functions and variance decompositions of forecast errors based on a VAR (vector auto‐regression) model. These tests provide evidence that the influence of the Asian market on the Indian market has increased during and after the Asian financial crisis. These results can be interpreted as evidence that the Indian market has been moving toward integration with other Asian markets.     

Dynamics of Idiosyncratic Volatility and Market Volatility: An Emerging Market Perspective

Abstract

Estimating idiosyncratic volatility (IVOL) using various model-dependent and model-independent measures, we investigate the characteristics of aggregate IVOL in Malaysia over the period 1990–2008. The IVOL estimated in all models have similar patterns and has no trend over the sample period. There is evidence of episodic phenomenon. During financial crisis periods, market volatility is relatively higher than IVOL – a plausible reason is high correlation between firms' returns. Small firms and low-priced stocks appear to influence IVOL more than large firms and high-priced stocks. In Malaysia, market volatility and IVOL may predict GDP growth.     

亚洲金融危机十年祭

1997年7月亚洲爆发了一场严重的金融危机,直到1999年才基本结束。从危机爆发至今已有十年。虽然,这些年对亚洲金融危机有各种各样的讨论,但并没有从最深层次的角度找到其爆发的根本原因。而且,当今世界在金融领域仍存在着许多不稳定因素。因此,本文力图从经济利益关系角度,结合东南亚各国的实际,对1997年亚洲金融危机进行新的反思,以对我国进一步开放金融市场提供一些有益的参考。     

论东亚各国资本移动自由化的影响——资本移动自由化的文献综述

亚洲各国的资本移动自由化开始于20世纪80年代后期至90年代之间。历经90年代后期的金融危机,亚洲各国的资本移动情况各不相同。以韩国为例,亚洲危机之后,外资流入股市的比例激增;另一方面,流入印尼和菲律宾的外资则多为外债的借入,投入股市及直接投资的比例几无成长。在中国,以其独特的外资管制政策抑制投入股市的总额之外,90年代后期起,更快速的开放国外直接投资的资本进入。文章拟就有关国际资本移动自由化既存的研究作简单回顾,同时考察亚洲各国对外资管制多样化的各种重要论述。     

Debt Sustainability and the Ongoing Financial Crisis: The Case of IDA‐only African Countries*

Abstract: The ongoing financial crisis has raised concerns in many circles about a potential future wave of sovereign defaults spreading among developing countries and, therefore, the need for additional rounds of debt relief in poor indebted countries. This paper addresses this issue for a group of 31 International Development Association (IDA)‐only African countries, which are in a fragile debt situation. Using the most recent debt sustainability analyses (DSAs) undertaken for these countries by the World Bank and the IMF, this paper studies the potential adverse effect of the ongoing financial crisis on the countries’ debt burden indicators, as a function of the depth and length of the crisis. The latter is measured by the fall and the duration of such fall in exports revenues, and by the terms at which each country can obtain financing to muddle through the crisis period. The analysis underscores the importance of concessional financing for these countries, especially if the crisis proves to be a protracted one. This, because the likelihood of countries being able to muddle through the crisis without defaulting on their external debt decreases with the hardening of the financial conditions faced by them — alternatively, the size of the downsizing in domestic (fiscal) expenditures needed to ensure the service of their foreign debts increases with the tightening of financial conditions.