Designing a Financial MarketStructure in Post-Crisis Asia

Abstract

Since the Asian financial crisis, strong and increasingly prevalent views have emerged thatbanks are no more functional and that economic development should rely on capital markets. Suchviews claim that the Asian crisis was caused by heavy dependence of firms’ investment on bank loansand that Asian commercial banks did not function as properly as those operating in some advancedcountries, due to crony relations among banks, firms, and governments. These views conclude thatpolicies should place less emphasis on bank loans and that Asian countries should develop domesticcapital markets as alternative more important sources of financing.This paper attempts to examine whether policy implications suggested by these prevalentviews are justifiable by considering the following two categories of questions. The first category isabout whether banks can be characterized as unsound and unfit institutions for economic developmentas often argued in the context of post-crisis Asia.Provided that existing economic theories andempirical studies clearly define basic functions and reason d’être of commercial banks, one then needsto ask: what went wrong with the banking system in Asia? The second category of questions focuseson why corporate bond markets are underdeveloped in many emerging market economies. Byanalyzing factors deterring the development of corporate bond markets, the paper then examineswhether, why, and how the markets should be developed.