Bad lending leading to the East Asian crisis in 1990s - Essay Example

Download file to see previous pages 347). The basic diagnosis attributed the crisis to the financial chaos caused by the financial systems riddled by the insider dealings, weak corporate governance, and corruption that caused inefficient spending investment. This weakened stability in the banking system. The economies in East Asia were successful for generations, and the crisis in1997 was unanticipated despite Yung Chul Park (1996) warning against impending crisis. Many foreign investors invested a lot of funds even at the onset of the crisis (Choe and Chinmay 2007, p. 232-255). This paper investigates on the bad lending that led to the financial crisis in East Asia in 1990s. This is because of the success of economies in East Asia that led to massive financial inflows in years leading to crisis, with few warning signs. Background to financial crisis Central to the full understanding of the cause of East Asian crisis is multifaceted evidence on the structure of the incentives used by financial and corporate sectors, which operated in the area. The moral problem magnified the financial vulnerability during the liberalization of the market in 1990s. This exposed fragility concerning the macroeconomic and the financial shocks that occurred between 1995 and 1997. This problem exhibited the three different, yet interrelated dimensions at corporate, the financial and the international level (Choe and Chinmay 2007, p. 232-255). The political pressures at the corporate level maintained high economic growth rates that guaranteed the private projects under government control. Even in the absence of the explicit bail-out promises, strategies and production plans of the corporate sector overlooked the riskiness and the costs of the investment projects. The industrial and financial policy enmeshed in the widespread business sector of political and personal favouritism and markets operated under the impression of their investment returns being insured from the adverse shocks. This represented underpinnings of the sustained process of accumulation of capital leading to account deficits. The investment rate remained high because of the fall in interest rates of neighbouring countries like Japan. As a result, banks borrowed excessively from abroad as well as lending excessively at home (Ichikawa 1998, p. 155-179). Extensive liberalization of the capital markets consistently provided large supply of funds at minimized costs to the domestic, corporate sector and national financial institutions. This motivated the exchange rate policies that reduced volatility of domestic currency in US dollars lowering the risk premium on the dollar-denominated debt. Internationally, moral hazard hinged on behaviour of the international banks. Over the period that led to crisis, international bands rented a lot of funds to the domestic intermediaries in the region neglecting the risk assessment standards. They presumed the direct government guarantee to the short-term interbank liabilities through bailout using the IMF support programs (Ichikawa 1998, p. 155-179). The stagnation of economy in Japan in 1990s lowered the exports from Asian countries. Few months before the crisis in East Asia, economy of Japan declined significantly, thus shattering the recovery process. The fall in ‘semi-conductors’ demand in 1996, and the adverse fluctuations in trade worsened the trade balances between 1996 and ...Download file to see next pages Read More