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Development of the Financial System in Post-Crisis Asia

dc.contributor.authorJohn Williamson
dc.date.accessioned2015-04-29T14:29:10Z
dc.date.available2015-04-29T14:29:10Z
dc.date.issued2000-03-15
dc.identifier.urihttp://hdl.handle.net/11540/4115
dc.description.abstractThe evidence of the East Asian crisis is now in, and does indeed point to the conclusion that weaknesses in the financial systems and free capital mobility played a central role in propagating and deepening the crisis. All the crisis countries had essentially opened themselves to uncontrolled inflows of short-term funds, and allowed foreign borrowing of their domestic currency. It is well known that the abolition of capital controls has often been followed by a large inflow of capital. Moreover, this inflow has typically been disproportionately in the form of short-term capital. As the crisis developed, domestic financial institutions found themselves unable to borrow, or even to roll over maturing loans on any terms at all. A major factor behind the financial crisis was the unbalanced currency exposure resulting from a large level of dollar borrowing. As illustrated by the case of Thailand, this meant that depreciation of the baht produced illiquidity/insolvency of the banks either directly (if the currency exposure was taken by them) or indirectly (if the currency exposure was taken by their customers, whose loans then turned bad). The banks’ financial problems then forced them to cut back lending, which aggravated, and may have been the principal cause, of the recession that followed. In terms of recommendations, the author suggested that while current account convertibility is certainly desirable, countries that still have capital controls should not be expected to make a sudden rush for convertibility. Such controls may be aimed at controlling the sudden withdrawal of short-term loans, by banks and other financial institutions, which led to earlier crises. While the author expressed a belief that people and governments can learn from the experience accrued from the financial crisis, he was actually less optimistic as to whether market participants will learn things that will head-off future crises. He also expressed doubts as to whether personal incentive structures in markets are calibrated in a way that makes it individually advantageous to take actions that reduce the likelihood of crisis. This will change only when governments decide to do something to change the parameters within which the markets operate. The primary lesson that the author drew for crisis-affected countries is to be cautious about liberalizing the capital account. This does not mean that they should freeze all activity in that direction, but it does mean avoiding getting carried away by euphoria when growth trends return, as now appears the case. A second lesson was that even if bankruptcy laws, good supervision, reformed corporate governance are of marginal relevance to the avoidance of crises, they are important to prepare developing countries for the next stage of development. In East Asia, the main needs are for strengthened bank supervision, better bank management, and, once that is in place, bank recapitalization. The final step would be to reprivatize those banks that were saved by the injection of public funds and are now owned by the government. He also mentioned that despite images to the contrary, equity markets are already rather well developed in Asia in comparison to world norms. In terms of banking reform, Dr. Williamson suggested an orderly approach that starts with building up supervisory and managerial capacity, followed by raising interest rates to something close to market-clearing levels. Only then should interest rates be freed and all controls on the flow of credit be abolished. As already argued, capital account liberalization should be left to the end.
dc.languageEnglish
dc.publisherAsian Development Bank Institute
dc.rightsCC BY 3.0 IGO
dc.rights.urihttps://creativecommons.org/licenses/by/3.0/igo/
dc.titleDevelopment of the Financial System in Post-Crisis Asia
dc.typeWorking Papers
dc.subject.expertEconomic Crisis
dc.subject.expertEconomic Efficiency
dc.subject.expertEconomic Policies
dc.subject.expertRegional Economic Development
dc.subject.expertJob Evaluation
dc.subject.expertEvaluation
dc.subject.adbPrice stabilization
dc.subject.adbFood prices
dc.subject.adbPrice policy
dc.subject.adbCrisis
dc.subject.adbUnemployment
dc.subject.adbEconomic cooperation
dc.subject.adbGross domestic product
dc.subject.adbEmployment
dc.subject.adbEconomic forecast
dc.subject.naturalOpen price system
dc.subject.naturalPrice fixing
dc.subject.naturalPrice regulation
dc.subject.naturalConsumer price indexes
dc.subject.naturalFinancial crisis
dc.subject.naturalLabor economics
dc.subject.naturalRegional economics
dc.subject.naturalTurnover
dc.subject.naturalEconomic survey
dc.subject.naturalJob analysis
dc.subject.naturalLabor turnover
dc.title.seriesResearch Paper Series
dc.title.volume8
dc.contributor.imprintAsian Development Bank
oar.themeEconomics
oar.themeEvaluation
oar.adminregionAsia and the Pacific Region
oar.countryBangladesh
oar.countryBhutan
oar.countryIndia
oar.countryMaldives
oar.countryNepal
oar.countrySri Lanka
oar.countryBrunei Darussalam
oar.countryCambodia
oar.countryIndonesia
oar.countryLao People's Democratic
oar.countryMalaysia
oar.countryMyanmar
oar.countryPhilippines
oar.countrySingapore
oar.countryThailand
oar.countryViet Nam
oar.countryCook Islands
oar.countryFiji Islands
oar.countryKiribati
oar.countryMarshall Islands
oar.countryFederated States of Micronesia
oar.countryNauru
oar.countryPalau
oar.countryPapua New Guinea
oar.countrySamoa
oar.countrySolomon Islands
oar.countryTimor-Leste
oar.countryTonga
oar.countryTuvalu
oar.countryVanuatu
oar.countryAfghanistan
oar.countryArmenia
oar.countryAzerbaijan
oar.countryGeorgia
oar.countryKazakhstan
oar.countryKyrgyz Republic
oar.countryPakistan
oar.countryTajikistan
oar.countryTurkmenistan
oar.countryUzbekistan
oar.countryPeople's Republic of China
oar.countryHong Kong
oar.countryChina
oar.countryRepublic of Korea
oar.countryMongolia
oar.countryTaipei,China
oar.identifierOAR-004694
oar.authorWilliamson, John
oar.importtrue
oar.googlescholar.linkpresenttrue


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