The Political Economy of Distress in East Asian Financial Institutions
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, poli...
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| Format: | Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2015
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| Online Access: | http://documents.worldbank.org/curated/en/2000/01/439056/political-economy-distress-east-asian-financial-institutions http://hdl.handle.net/10986/22263 |
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okr-10986-222632021-04-23T14:04:07Z The Political Economy of Distress in East Asian Financial Institutions Bongini, Paola Claessens, Constantijn A. Ferri, Giovanni ACCOUNTING STANDARDS BALANCE SHEET BANK EXAMINATIONS BANK FAILURE BANKING INSTITUTIONS BANKING RESTRUCTURING BANKING SYSTEM BANKING SYSTEMS BANKS CAPITAL ADEQUACY COMMERCIAL BANKS CORPORATE GOVERNANCE DATA QUALITY DEPOSIT INSURANCE DEPOSITS ECONOMIC POLICIES EMERGING MARKETS EXCHANGE OF IDEAS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DATA FINANCIAL INFORMATION FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES FINANCIAL RATIOS FINANCIAL RESTRUCTURING FINANCIAL RISK FOREIGN BANKS FOREIGN EXCHANGE FOREIGN INVESTORS ILLIQUIDITY INTEREST INCOME INTERNATIONAL ACCOUNTING STANDARDS INVESTMENT BANKS LENDING BEHAVIOR LOCAL INSTITUTIONS MACROECONOMIC SHOCKS MACROECONOMIC VARIABLES MERCHANT BANKS MONETARY ECONOMICS NONBANK FINANCIAL INSTITUTIONS NONBANK INSTITUTIONS NONBANKS OPERATING EXPENSES POLICY RESEARCH POLICYMAKERS POLITICAL ECONOMY POLITICAL INTERFERENCE PORTFOLIOS PRIVATE FINANCIAL INSTITUTIONS PROFITABILITY PRUDENTIAL REGULATIONS PUBLIC INFORMATION PUBLIC POLICY RECAPITALIZATION REGRESSION MODELS REGULATORY CAPTURE REGULATORY FORBEARANCE RETURN ON ASSETS RISK EXPOSURE SAVINGS SECURITIES SECURITIES MARKETS SPECIALIZED BANKS STATISTICAL TECHNIQUES SUPERVISORY AGENCIES 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 institutions 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. 2015-07-21T14:38:08Z 2015-07-21T14:38:08Z 2000-01 Working Paper http://documents.worldbank.org/curated/en/2000/01/439056/political-economy-distress-east-asian-financial-institutions http://hdl.handle.net/10986/22263 English en_US Policy Research Working Paper;No. 2265 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper East Asia and Pacific Indonesia Korea, Republic of Malaysia Philippines Thailand |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
ACCOUNTING STANDARDS BALANCE SHEET BANK EXAMINATIONS BANK FAILURE BANKING INSTITUTIONS BANKING RESTRUCTURING BANKING SYSTEM BANKING SYSTEMS BANKS CAPITAL ADEQUACY COMMERCIAL BANKS CORPORATE GOVERNANCE DATA QUALITY DEPOSIT INSURANCE DEPOSITS ECONOMIC POLICIES EMERGING MARKETS EXCHANGE OF IDEAS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DATA FINANCIAL INFORMATION FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES FINANCIAL RATIOS FINANCIAL RESTRUCTURING FINANCIAL RISK FOREIGN BANKS FOREIGN EXCHANGE FOREIGN INVESTORS ILLIQUIDITY INTEREST INCOME INTERNATIONAL ACCOUNTING STANDARDS INVESTMENT BANKS LENDING BEHAVIOR LOCAL INSTITUTIONS MACROECONOMIC SHOCKS MACROECONOMIC VARIABLES MERCHANT BANKS MONETARY ECONOMICS NONBANK FINANCIAL INSTITUTIONS NONBANK INSTITUTIONS NONBANKS OPERATING EXPENSES POLICY RESEARCH POLICYMAKERS POLITICAL ECONOMY POLITICAL INTERFERENCE PORTFOLIOS PRIVATE FINANCIAL INSTITUTIONS PROFITABILITY PRUDENTIAL REGULATIONS PUBLIC INFORMATION PUBLIC POLICY RECAPITALIZATION REGRESSION MODELS REGULATORY CAPTURE REGULATORY FORBEARANCE RETURN ON ASSETS RISK EXPOSURE SAVINGS SECURITIES SECURITIES MARKETS SPECIALIZED BANKS STATISTICAL TECHNIQUES SUPERVISORY AGENCIES |
| spellingShingle |
ACCOUNTING STANDARDS BALANCE SHEET BANK EXAMINATIONS BANK FAILURE BANKING INSTITUTIONS BANKING RESTRUCTURING BANKING SYSTEM BANKING SYSTEMS BANKS CAPITAL ADEQUACY COMMERCIAL BANKS CORPORATE GOVERNANCE DATA QUALITY DEPOSIT INSURANCE DEPOSITS ECONOMIC POLICIES EMERGING MARKETS EXCHANGE OF IDEAS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DATA FINANCIAL INFORMATION FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES FINANCIAL RATIOS FINANCIAL RESTRUCTURING FINANCIAL RISK FOREIGN BANKS FOREIGN EXCHANGE FOREIGN INVESTORS ILLIQUIDITY INTEREST INCOME INTERNATIONAL ACCOUNTING STANDARDS INVESTMENT BANKS LENDING BEHAVIOR LOCAL INSTITUTIONS MACROECONOMIC SHOCKS MACROECONOMIC VARIABLES MERCHANT BANKS MONETARY ECONOMICS NONBANK FINANCIAL INSTITUTIONS NONBANK INSTITUTIONS NONBANKS OPERATING EXPENSES POLICY RESEARCH POLICYMAKERS POLITICAL ECONOMY POLITICAL INTERFERENCE PORTFOLIOS PRIVATE FINANCIAL INSTITUTIONS PROFITABILITY PRUDENTIAL REGULATIONS PUBLIC INFORMATION PUBLIC POLICY RECAPITALIZATION REGRESSION MODELS REGULATORY CAPTURE REGULATORY FORBEARANCE RETURN ON ASSETS RISK EXPOSURE SAVINGS SECURITIES SECURITIES MARKETS SPECIALIZED BANKS STATISTICAL TECHNIQUES SUPERVISORY AGENCIES Bongini, Paola Claessens, Constantijn A. Ferri, Giovanni The Political Economy of Distress in East Asian Financial Institutions |
| geographic_facet |
East Asia and Pacific Indonesia Korea, Republic of Malaysia Philippines Thailand |
| relation |
Policy Research Working Paper;No. 2265 |
| description |
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 institutions 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. |
| format |
Working Paper |
| author |
Bongini, Paola Claessens, Constantijn A. Ferri, Giovanni |
| author_facet |
Bongini, Paola Claessens, Constantijn A. Ferri, Giovanni |
| author_sort |
Bongini, Paola |
| title |
The Political Economy of Distress in East Asian Financial Institutions |
| title_short |
The Political Economy of Distress in East Asian Financial Institutions |
| title_full |
The Political Economy of Distress in East Asian Financial Institutions |
| title_fullStr |
The Political Economy of Distress in East Asian Financial Institutions |
| title_full_unstemmed |
The Political Economy of Distress in East Asian Financial Institutions |
| title_sort |
political economy of distress in east asian financial institutions |
| publisher |
World Bank, Washington, DC |
| publishDate |
2015 |
| url |
http://documents.worldbank.org/curated/en/2000/01/439056/political-economy-distress-east-asian-financial-institutions http://hdl.handle.net/10986/22263 |
| _version_ |
1764450571467620352 |