Ebook Wealth Effects of Bank Restructuring Policies following the Asian Financial Crisis
The past two decades have witnessed a spate of financial crises around the world. Caprio and Klingebiel (2003) document 112 episodes of systemic banking crises in 93 countries and another 51 borderline instances of banking crises in 46 countries. Economies that have experienced systemic crises require a substantial and expensive overhaul of their banking system. The intermittent occurrence of financial crises provides the impetus for a careful analysis of the roots of a financial crisis and the design of effective policies for the resolution of the crisis.
The causes of the Asian crisis have been analyzed extensively, but relatively few studies have evalu ated the impact of bank restructuring policies on bank share prices in the distressed economies, and other countries with exposure to the crisis-hit countries. This study differs from the existing literature, in that it aims to assess the impact of the restructuring policies using a two-tier analysis of wealth effects and operational performance of banks in the countries studied. We attempt to provide an assessment of the early bank restructuring efforts in Indonesia, Korea, Malaysia and Thailand. Additionally, while most studies estimate only the aggregate impact of policy responses to the crisis in the banking sector, our model, by monitoring changes in banking indices estimates abnormal returns for each bank. Drawing upon a study by Klingebiel et al. (2001) we compare the impact of different restructuring announcements on bank shareholders wealth.
The crisis (“AFC” or “the crisis”) in Indonesia, Korea, Malaysia and Thailand revealed how poor lending practices and overleveraging in the corporate sector led to widespread corporate bankruptcies and bank failures. The twin shocks of exchange rate devaluation and sharp increases in interest rate raised the real value of debt and debt service requirements. As a result many borrowers defaulted on their debt obligations. This was reflected in the soaring volume of nonperforming loans in bank portfolios that soon resulted in turbulence in the banking sector and capital markets across the region.
The AFC affected the rapidly growing economies of East and Southeast Asia and necessitated large financial bailouts. Radelet and Sachs (2000) note that it was the least anticipated crisis in years. Since 1997, governments of the countries mentioned above have implemented policy changes to restore the financial health of their economies. Financial restructuring in all these Asian countries has been among the most expensive in the world, averaging 32% of GDP (Honohan and Klingebiel, 2000). Except for Malaysia, many policy changes were implemented in accord with conditionalities attached to stabilization loans from the International Monetary Fund.
This study evaluates the impact of the initial financial restructuring policies on the banking sectors of Indonesia, Malaysia, Thailand and Korea, by examining the wealth effects arising from the announcement of restructuring policies. We focus on five types of measures typically used by governments to restore overall public confidence, namely, liquidity support to banks, guarantees of bank liabilities, bank closures, provision of public funds for recapitalization of financial and corporate sectors, and finally the creation of centralized asset management companies.
The immediate effects on shareholders’ wealth are traced using an event study methodology where we monitor short-term stock returns of banks. We ask the following questions: Did bank shareholders benefit from the financial restructuring strategies? Was the response to the restructuring policies similar across banks? Did news of restructuring initiatives result in systemic benefits for the entire banking industry? In the immediate aftermath of the announcement of the restructuring policies, these questions are answered by testing the significance of the abnormal returns estimated using a multivariate regression model. This approach has been adopted in several recent studies including Kho et al. (1999), Kho and Stulz (2000) and Lau and McInish (2003).
To obtain a sharper insight into how banks were affected by the crisis, we conduct a financial ratio analysis of the banking sector in each country comparing bank performance before and after implementation of restructuring policies. Financial ratios have been generally accepted as good indicators of corporate performance and management effectiveness. Their relevance in studying bank performance is confirmed by Dziobek and Pazarba??o?lu (1997), Cornett et al. (2002) and Demirgüc-Kunt (2000). The analysis of financial ratios allows a comparison of the immediate response to bank restructuring policies with operating performance of the banks in the medium term.
Our results show that shareholders of East Asian banks experienced significant losses during the announcements of the restructuring policies between June 1997 and September 1998. On average, abnormal returns were -4.92%, -3.72%, -6.54% and -8.69% for bank shareholders in Indonesia, Korea, Malaysia and Thailand respectively. We also find that there wasn’t a significant improvement in the stock and flow ratios which signals that the financial and operational restructuring measures did not significantly affect bank performance. Reasons for this response are discussed later in the paper.
The rest of this paper is organized as follows. The next section provides an overview of the Asian financial crisis and detail the restructuring measures used by the four countries analyzed. The chronology of restructuring announcements monitored and the data framework used in this study are also included in this chapter. Section 3 reviews existing literature in the area of event studies and the impact of financial crises on bank security prices. Section 4 outlines the methodology used in this research followed by a discussion and interpretation of the empirical results in Section 5. Section 6 concludes.
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