LATEST PUBLICATIONS
SEARCA PBS 2021
Strategies for Effective Implementation of the CPAR Program - Building Up From the Gains: Lessons From the Improvements for Effective Implementation of the Community-Based Participatory Action Research Program (SEARCA-DA-BAR Policy Brief 2021)
WP-2019-06
Skills Needs Anticipation (SNA): Workplace Skills and Satisfaction (WSS) Baseline Survey of Select Employers in the Construction Industry
WP-2019-05
Strengthening Multi-employer Bargaining: Policies and Practices (Phase II)
WP-2019-04
Non-Hazardous Activities for Children: The Case of Banana and Sugarcane Supply Chains

LATEST AV MATERIALS
PIDS WB 2021-0905
7th Mindanao Policy Research Forum
PIDS WB 2021-0905
Annual Public Policy Conference Webinar 4: Robust and Healthy Workforce and Closing Program
PIDS WB 2021-0904
Annual Public Policy Conference Webinar 3: Green And Inclusive Recovery
PIDS WB 2021-0903
Annual Public Policy Conference Webinar 2: Ethical Business
Publication Detail
WPS 1959: Is there a credit crunch in East Asia?

The issue of the credit crunch in the aftermath of the Asian crisis has stimulated much debate. Indeed, some features of the East Asian economies, such as bank-based financial systems and high leverage, make them particularly vulnerable to monetary and financial shocks. Under such circumstances, the credit channel of transmission of these shocks is likely to lead to a credit crunch, affecting the flow of bank loans to those agents--households and small and medium-sized enterprises--for whom close substitutes for bank credit are unavailable. In turn, the disruption to the availability of finance for bank-dependent borrowers may stymie economic activity. In practice, however, it is difficult to detect the credit channel effects that lead to a credit crunch. Reliance on trends of credit aggregates alone is inadequate to prove that there has been an adverse shift in the supply of loans: even a decline or slowdown of credit could stem from a decrease or deceleration in demand. A frequently used methodology to overcome this problem focuses on both credit aggregates and the yield spread between bank loans and risk-free assets, such as government bonds. If this spread rises while credit aggregates slow down, one can conjecture that the supply of loans has either decreased more or increased less than demand. But further qualification is needed. The increase of the spread might simply reflect a rising risk premium triggered by the fact that the negative shock reduces the net worth of economic agents because of larger financial outlays. Accordingly, the relevant spread to capture the worsening credit conditions that affect bank-dependent borrowers is the spread between bank lending rates and corporate bonds. The yield spread corporate and government bonds measures the general risk premium. The study applies this methodology to Indonesia, Malaysia, the Philippines, the Republic of Korea, and Thailand, and shows that the credit crunch is widespread, while its negative impact particularly affects small banks and enterprises. On the basis of the findings, the authors claim that 1) a protracted and heavy reliance on tight monetary policy, entailing high real interest rates, appears inappropriate for restoring market confidence; 2) it is desirable to consider alternative policy instruments that do not place further stress on the banking sector and on its lending to the corporate sector; and 3) policy actions are warranted to alleviate the strain that the crisis has put on small banks and enterprises.

World Bank
Authors Keywords
Ferri, Giovanni; Wei Ding; Domac, Ilker; capital markets; capital investment; banking system; monetary policy; banking sector;
Download PDF Number of Downloads
Published in 1959 and available for Downloaded 306 times since November 25, 2011
×
Please let us know your reason for downloading this publication. May we also ask you to provide additional information that will help us serve you better? Rest assured that your answers will not be shared with any outside parties. It will take you only two minutes to complete the survey. Thank you.


To use as reference:
If others, (Please specify):
Name: (optional)
Email: (required, but will not display)
Age:
Gender:
If Prefer to self-describe, please specify:
Level of Education:
Occupation:
If employed either part-time or full-time, name of office:
If others, (Please specify):
Would you like to receive the SERP-P UPDATES e-newsletter? Yes No
Use the space below if you have any comment about this publication or SERP-P knowledge resources in general.