Banking Crises in East Asia: The Price Tag of Liberalization?


Ilan Noy

AsiaPacific Issues, No. 78


Honolulu: East-West Center

Publication Date: November 2005
Binding: paper
Pages: 8
Free Download: PDF


The banking crises that swept through East Asia in 1997-1998 set off dramatic recessions in the affected countries and imposed heavy costs on the domestic taxpayers. Fear of further crises prompted searches for causes and early warning signs. It soon became apparent that liberalization of the domestic financial sectors of the countries in crises contributed to the genesis of these crises, but policymakers, regulators, and economists disagree about the reason for this. Initial scrutiny fell on unregulated international capital flows, but a comprehensive study suggests that liberalization can lead to financial instability either because of insufficient regulation of the financial sector or because of erosion of previously granted monopolies of existing banks. These possibilities suggest varying policy implications for the current state of domestic financial systems in East Asia, including the challenges inherent in opening up China's banking system to foreign competition as mandated in the China-World Trade Organization accession agreement.