The Political Economy of Distress in East Asian Financial Institutions

By P. Bongini, Stijn Claessens, G. Ferri. 2000

203 citations recorded by the source corpus.

Politics and regulatory capture can play an important role in financial institutions'distress. East Asia's financial crisis featured many distressed and closed financial intermediaries in an environment with many links between government, politicians, supervisors, and financial institutions. This makes the East Asian financial crisis a good event for studying how such connections affect the resolution of financial institutions'distress. The authors investigate distress and closure decisions for 186 banks and 97 non-bank financial institutions in Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand. They find that after July 1997, 42 percent of the institutions experienced distress (were closed, merged, or re-capitalized, or had their operations temporarily suspended). By July 1999, 13 percent of all institutions in existence in July 1997 had been closed. Using financial data for 1996, the authors find that: 1) Traditional CAMEL-type variables - returns on assets, loan growth, and the ratio of loan loss reserves to capital, of net interest income to total income, and of loans to borrowings - help predict subsequent distress and closure. 2) None of the foreign-controlled institutions were closed, and foreign portfolio ownership lowered an institution's probability of distress. 3)"Connections"- with industrial groups of influential families - increased the probability of distress, suggesting that supervisors had granted forbearance from regulations. Connections also made closure more, not less, likely - suggesting that the closure processes themselves were transparent. 4) But larger institutions, although more likely to be distressed, were less likely to be closed, while (smaller) non-bank financial institutions were more likely to be closed. This suggests a"too big to fail"policy. 5) These policies, together with the fact that resolution processes were late and not necessarily comprehensive, may have added to the overall uncertainty and loss of confidence in the East Asian countries, aggravating the financial crisis.

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Citations in the corpus

Connected Lending: Thailand before the Financial Crisis (2006, methodology): “) In addition, as several authors have also noted (Khanna (2000), Bongini et al. (2001), Chui et al.”
Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn from Financial Indicators (2002, background): “More recently, Bongini et al (1999) assess the predictability power of CAMEL-type variables on banking failures in East Asia.”
Explaining bank distress in Eastern European transition economies. (2009, background): “(http://www.bvdep.com/en/ s round the world. ful survey, Bongini et al. (2000) for a pooled study of five East Asian countries and Arena (2005) for a comparison of the two regions.”
Financial liberalization, prudential supervision, and the onset of banking crises (2004, background): “Bongini et al. (2001) examine the evolution of the East Asian crisis, which was accompanied by large-scale banking problems.”
Market concentration, risk-taking, and bank performance: evidence from emerging economies (2013, background): “5 financial crisis (Mannasoo and Mayes, 2009; Bongini et al., 2000), banking problems in Asian and South American in the 1980s and 1990s (Arena, 2005), and bank performance in individual countries (Berger et al.”
Banking Competition and Capital Ratios (2007, unknown): “By contrast, foreign-owned institutions are often considered to be characterized by efficiency in risk management procedures and by more sophisticated corporate governance systems (Bongini et al., 2001).”
Bank Failures and Bank Fundamentals: A Comparative Analysis of Latin America and East Asia during the Nineties using Bank-Level Data (2008, methodology): “The main contributors to the literature of bank failures in EMs using bank-level data are Gonzalez-Hermosillo (1999), Bongini, Claessens, and Ferri (2001), and Rojas-Suarez (2001).”