Seoul Journal of Economics - Vol. 11 , No. 4

[ Article ]
Seoul Journal of Economics - Vol. 11, No. 4, pp. 483-504
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 1998
Received Aug 1998 Revised Oct 1998

Korean Currency Crisis: The Financial Sector Fragility
Jang-Yung Lee
Korea Institute of Finance, KFB Building 6-8th Floor, 4-1 1-Ga Myong-dong, Chung-gu, Seoul, 100-012, Korea ( jylee@sun.kif.re.kr)

JEL Classifications: C41, E44, G21


This paper examines the behavior of various financial fragility indicators in Asian crisis countries during the five years preceding the crisis. The comparison with a control group composed of non-crisis countries shows that several banking pressure indices can be identified as useful leading indicators, including the bank loan-to-deposit ratios, the ratios of bank loans to GDP, and the ratios of banks loans to industrial production. Other measures of banking sector vulnerability, such as the large exposure to foreign exchange risk or volatility of key economic variables were of limited value in predicting the Asian crisis. Also, a closer examination of indicators of bank franchise value reveals that there did not exist incentives faced by bank managers for prudent behavior.

1. Calvo, Guillermo A. “Varieties of Capital-Market Crises.” A paper is part of a project on Financial Sector and Growth sponsored by the Inter-American Development Bank, February 1995.
2. Calvo, Guillermo A. Leiderman, L., and Reinhart, C. M. “Capital Inflows and Real Exchange Rate Appreciation: the Role of External Factors.” IMF Staff Papers 40 (1993): 108-51.
3. Calvo, Guillermo A., and Mendoza, Enrique G. “Reflections on Mexico's Balance-of-Payments Crisis: A Chronicle of a Death Foretold.” October 1995.
4. De Juan, Aristobulo. “The Roots of Banking Crises: Micro-Economic Issues and Issues of Supervision and Regulation.” Presented in the Korea Institute of Finance Seminar on Banking Crisis Resolution Issues: International Lessons for Korea, Seoul, Korea July 1998.
5. Folkerts-Landau, David et al. “Effects of Capital Flows on the Domestic Financial Sectors in APEC Developing Countries,” in “Capital Flows in the APEC Region,” IMF Occasional Paper No. 122. Washington: International Monetary Fund, March 1995.
6. Fry, Maxwell J. Money, Interest and Banking in Economic Development. Baltimore: Johns Hopkins University Press, 2nd Edition, 1994.
7. Garber, Peter. “Managing Risks to Financial Markets from Volatile Capital Flows: The Role of Prudential Regulation.” Providence, Rhode Island: Brown University, Economics Department, Unpublished, 1995.
8. Goldstein, Morris, and Turner, Philip. “Banking Crises in Emerging Economies: Origins and Policy Options.” BIS Economic Papers No. 46. Banking for International Settlements, October 1996.
9. Kaminsky, Graciela, and Reinhart, Carmen M. “The Twin Crises: The Causes of Banking and Balance-of-Payments Problems.” International Finance Discussion Paper No. 544. Washington, D. C.: Board of Governors of the Federal Reserve, March 1996.
10. Kaminsky, Graciela, Lizondo, Saul, and Reinhart, Carmen M. “Leading Indicators of Currency Crises.” IMF Working Paper WP/97/79. International Monetary Fund, July 1997.
11. Kane, Edward. The S & L Insurance Mess: How Did It Happen? Washington, D. C.: The Urban Institute Press, 1989.
12. Kapur, Ajay, and Ma, Miranda. “Banking Crises in Asia: Who's Next? and Why?” UBS Global Research. Union Bank of Switzerland, July 1997.
13. Krugman, Paul. “A Model of Balance of Payments Crisis.” Journal of Money, Credit and Banking 11 (August 1979): 311-25.
14. Montes, Manuel F. The Currency Crisis in Southeast Asia. Singapore : Institute of Southeast Asian Studies, 1998.
15. Obstfeld, Maurice. “Rational and Self-Fulfilling Balance-of-Payments Crises.” The American Economic Review Vol. 76 (March 1986).
16. Rojas-Suárez, Liliana, and Weisbrod, Steven. “Financial Fragilities in Latin America: the 1980s and the 1990s.” IMF Occasional Paper No. 132. Washington: International Monetary Fund, October 1995.