Banks and Financial Intermediation in Emerging Asia: Reforms and Risks

Abstract

The Asian banking systems have been hit by several large shocks over the past decade. A financial meltdown in the late 1990s almost crippled the Asian financial intermediation process, leading to a massive loss of output and subsequent efforts by Asian authorities to overhaul the banking system. This was followed by the 2001 global slowdown. The 2007–08 global financial crisis proved to be a huge stress test for the Asian banking system. Up to the time of writing, however, most of Asian banks seem to have weathered the crisis rather well. The conventional view about the transformation of the banking system since the Asian crisis goes something like this. Prior to the 1997 financial crisis, Asian banks had become exposed to very large credit risks, which were badly managed and poorly supervised. Moreover, the banks were inadequately capitalised for the risks they were running. And too many risks were concentrated in the banking system because capital markets were insufficiently developed. In the decade since the crisis, banks have reduced their legacy bad assets, managed credit risk more effectively and have become better capitalised. Because private capital market development has been slower, banks remain the dominant channel of finance in Asia. All this reduced Asia’s exposure to the recent global financial crisis. This paper thus seeks to summarise the complex forces acting to change financial intermediation in Asia