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

Abstract

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.

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