© 1999 International Monetary Fund

Production: IMF Graphics Section

Typesetting: Joseph Ashok Kumar

Figures: In-Ok Yoon

Library of Congress Cataloging-in-Publication Data

Financial sector crisis and restructuring : lessons from Asia / Carl-Johan Lindgren… [et al.].

p. cm. — (Occasional paper: 188)

Includes bibliographical references.

ISBN 1-55775-871-9

1. Finance—Asia—Case studies. 2. Financial crises—Asia—Case studies. I. Lindgren, Carl-Johan II. Occasional paper (International Monetary Fund); 188.

HC187.A2 F57 1999

332’.095—dc21

99-088474

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Contents

• Preface

• List of Abbreviations

• I Overview

  • Origins of the Crisis

  • Coping with the Crisis

  • Bank Restructuring

  • Cost of Restructuring

  • Other Issues

  • Role of the IMF

  • Could the Crisis Have Been Prevented?

• II Vulnerabilities

  • Macroeconomic and Financial Weaknesses

  • Structural Vulnerabilities

• III Addressing the Emergency

  • Macroeconomic Policies

  • Liquidity Support

  • Blanket Guarantees

  • Capital Controls and Debt Rescheduling

  • Immediate Closing of Financial Institutions

• IV Monetary and Credit Policies

  • Monetary Mangement

  • Credit Crunch

• V Bank Restructuring

  • Broad Principles and Policies

  • Institutional Arrangements

  • Issues in Valuing Bank Assets

  • Speed of Recapitalization

  • Dealing with Troubled Institutions

  • Dealing with Impaired Assets

  • Cost of Restructuring

  • Institutional Constraints

  • Linkages to Corporate Sector Restructuring

• VI Institutional Reform

  • Prudential Supervision

  • Prudential Regulation

  • Regulation Governing Creditors

• VII Financial Sector Reforms in IMF-Supported Programs

• VIII Conclusions and Lessons

• Appendices

• I Indonesia

• II Korea

• III Malaysia

• IV The Philippines

• V Thailand

• Bibliography

• Boxes

• Section

• I

  • 1. A Chronology of the Asian Crisis, March 1997-July 1999

  • 2. Ten Critical Points in Managing and Resolving a Systemic Bank Crisis

• II

  • 3. Structure of the Financial System at the End of 1996

  • 4. Weaknesses in Disclosure Practices in the Asian Crisis Countries

• III

  • 5. Bank Resolution Procedures: Terminology and Definitions

  • 6. Emergency Capital Control Measures

  • 7. Considerations Regarding the Immediate Closure of Banks in a Systemic Crisis

  • 8. Indonesia: Closure of 16 Banks

• IV

  • 9. Principal Issues in Devising a Bank Restructuring Strategy

  • 10. Advantages and Disadvantages of a Centralized Public Asset Management Company

  • 11. The Augmented Fiscal Balance

  • 12. Linkage to Corporate Restructuring

• VII

  • 13. Financial Sector Restructuring Measures in IMF-Supported Programs

• Appendix

• I

  • 14. Indonesia: Outline of Steps Toward Bank Resolution

• II

  • 15. Korea: KAMCO Operations

  • 16. Korea: Mergers and Foreign Investment in the Financial Sector

• III

  • 17. Malaysia: Measures Announced on March 25, 1998

• V

  • 18. Thailand: Capital Support Facilities

• Tables

• Section

• II

  • 1. Selected Economic Indicators

  • 2. Selected Indicators of Vulnerability

• III

  • 3. Liquidity Support Provided to Financial Institutions, June 1997 to June 1999

• IV

  • 4. Standard Deviation of Selected Monetary Indicators

  • 5. Measures to Alleviate the Credit Slowdown

• V

  • 6. Summary of Measures to Address the Financial Sector Turmoil

  • 7. Mergers, Closures, and State Interventions of Financial Institutions

  • 8. Framework for Managing Impaired Assets

  • 9. Public Asset Management Companies in the Asian Crisis Countries

  • 10. Pros and Cons of Decentralized Asset Management

  • 11. Authorities’ Estimates for the Gross Cost of Financial Sector Restructuring

  • 12. Instruments Used to Recapitalized and Purchase Nonperforming Loans

• VI

  • 13. Time Period for Overdue Criteria for Interest Suspension and Loan Classification

  • 14. Loan Provisioning Requirements: Comparative Information

• Appendix

• I

  • 15. Indonesia: Public Cost for Financial Sector Restructuring

• II

  • 16. Korea: Government Ownership of Commercial Banks

  • 17. Korea: Public Cost for Financial Sector Restructuring

• III

  • 18. Malaysia: The Structure of the Malaysian Financial System

  • 19. Malaysia: Public Cost for Financial Sector Restructuring

• IV

  • 20. Philippines: Selected Banking Sector Indicators as of December 31, 1998

• V

  • 21. Thailand: Public Cost for Financial Sector Restructuring

• Figures

• Section

• II

  • 1. Balance on Capital and Financial Account/GDP

  • 2. Real GDP Growth

  • 3. Real Effective Exchange Rate

  • 4. Nominal Credit Growth to the Private Sector

• III

  • 5. Selected Asian Countries: Central Bank Liquidity Support

• IV

  • 6. Indonesia: Daily Interbank Money Market Rates by Type of Bank

  • 7. Growth Rate of Real Credit to the Private Sector

• VIII

  • 8. Nominal Exchange Rate

• Appendix

• I

  • 9. Indonesia: Progress in Financial Sector Restructuring

• II

  • 10. Korea: Progress in Financial Sector Restructuring

• V

  • 11. Thailand: Progress in Financial Sector Restructuring

Preface

This paper reviews the policy responses of Indonesia, Korea, and Thailand to the Asian crisis that erupted in 1997 and compares the actions of these three countries with those of Malaysia and the Philippines, which were buffeted by the crisis. Although work is still under way in all the affected countries, and thus any judgments are necessarily tentative, important lessons can be learned from the various experiences of the last two years.

The paper reflects these lessons and the emerging policies of the IMF’s Monetary and Exchange Affairs Department (MAE). The material in this paper was originally prepared for discussion in the IMF’s Executive Board in early September 1999. It was prepared under the direction of Stefan Ingves, Director of MAE, by a staff team led by Carl-Johan Lindgren and consisting of Tomás J.T. Baliño and Charles Enoch (who have been leading the department’s work in Thailand, Korea, and Indonesia, respectively), Anne-Marie Gulde, Marc Quintyn, and Leslie Teo. Elena Budreckaite and Kiran Sastry provided research assistance, and Charmane Ahmed and Janet Stanford secretarial support. Jeff Hayden of the External Relations Department edited the report and coordinated its publication. The team benefited from contributions of numerous other MAE staff members involved in the department’s work in the five countries, as is acknowledged in Appendices I–V. The paper thus reflects the hands-on experience of the MAE staff and experts involved.

The paper has also benefited from comments of the IMF’s Executive Directors, colleagues in MAE, the Asia and Pacific Department (APD), and other departments in the IMF, as well as from colleagues in the World Bank. The views expressed in the paper are those of the IMF staff and do not necessarily reflect the views of the national authorities or IMF Executive Directors.

List of Abbreviations