Comment on “Are Banking Systems in East Asia Stronger?”

Turner’s (2007) excellent paper analyzes the causes of financial crisis in four Asian countries in 1997–1998 and policy responses to rebuild the banking systems in Indonesia, South Korea, Malaysia, and Thailand. The financial instability in Asia involved twin crises, namely, a simultaneous occurrence of a banking crisis and a currency crisis. Turner rightly identifies five interrelated policy measures introduced in this region to solve the problems. First, policies to restore macroeconomic stability, accumulate external reserves, and promote economic growth. Second, policies to reduce the need for foreign exchange intervention by replacing the fixed exchange rate system with a floating regime in 1997. The shift replaced the exchange rate target with an inflation target as the nominal anchor for monetary policy. Having been temporarily pegged to the US dollar during the crisis, the Malaysian ringgit moved to independent floating in April 2005. The third set of policies involved the recapitalization of financially distressed banks. Fourth, there were policies to reduce the banking system’s reliance on short-term financing by developing more stable long-term financing from local and regional securities, and derivative markets. Fifth, there were policies to strengthen the financial infrastructure by upgrading governance, prudential supervision, and establishing safety net for the banking system as well as the more complex institutions that surround bond and capital markets. None of the four crisis-affected countries has resorted to financial suppression in dealing with the financial market failures. Of these countries, only Malaysia temporarily imposed capital controls to help address the currency crisis. To gain a better understanding of how the countries in this region rebuild external reserves, Turner needs to analyze in more detail the different sources of reserve accumulation in the four crisis-affected countries. South Korea builds its external reserves mainly from exports. In contrast, Indonesia generates its external reserves mainly from the volatile short-term capital inflows. There are two programs introduced in this region for resource pooling to supplement the International Monetary Fund facilities. The Bilateral Swap Arrangement was introduced in March 2000 under the Chiang Mai Initiative, and the Asian Bond Fund was created in 2003 by the Executives’ Meeting of East Asia–Pacific Central Banks, a group of 11 regional central banks. The market share of foreign banks has increased after the crisis. Equipped with strong reputations, wide international networks, advanced technology, and rapid product innovation, foreign banks can attract prime customers. By appointing knowledgeable and experienced personnel in the relevant fields and using local expertise, foreign banks can