ABSTRACT
The recent Asian financial crisis has placed banks at the central of attention. While the sharp devaluation of various currencies in East Asia and subsequent drastic fall in their stock prices are generally unanticipated at least in magnitudes, the role of the banking system in the propagation of financial and monetary shocks has been much emphasised. Prior to the crisis, domestic banks were able to lend aggressively because of excessive liquidity in the banking system. However, the financial turmoil that started with the devaluation of the Thai baht on July 2, 1997 led to a reversal of banks’ lending behaviour resulting in massive contraction of bank loans. The subsequent reduction in real output in the affected countries is drastic, equally unexpected as the initial drastic fall in the exchange rates and stock prices. In 1997, the growth rates of Indonesia, Korea, Malaysia, the Philippines, and Thailand were respectively 4.7percent, 5.0percent, 7.3percent, 5.2percent, and -1.7percent. These growth rates drastically dropped to respectively >13.1 percent, - 6.7percent, -7.4percent, -0.6percent, and -10.2percent in 1998. Given this chain of events from currency devaluation to credit crunch to finally contraction in economic activity, bank credits may have played an important role in aggravating the economic downturn observed during the Asian crisis.
