Understanding the Asian financial crisis : now and then

Abstract

This thesis investigates the effects of sovereign credit default spreads and the national current account balance on the health of a country’s banking sector as measured by the Bank Z-score. To this end, we use a cross-country panel dataset of five ASEAN (Association of South East Asian Nations) economies and implement regression analysis in order to study the effects of these two variables on the Bank Z-score. We hypothesize that that higher default spreads weakens a country’s banking sector, whereas an improvement in the current account balance helps to increase the Bank Z-score. However, we find that only the effects of the default spreads are confirmed while the effects of the current account balance are only partially supported. These results suggest that the market-based measure, the default spreads, is indicative of a country’s financial vulnerability while the accounting-based measure, the current account balance, is only partially so. We also briefly explore the initiatives that followed the Asian Financial Crisis in 1997, namely the Chiang Mai Initiative and the ASEAN Economic Community framework, and assess whether these will contribute towards strengthening regional banking sectors and thereby prevent financial crises in the future.