The Banking System in East Asia and the Transmission of the Global Financial Crisis

This paper asks whether the impacts of the Global Financial Crisis on 10 East Asian economies were amplified through the banking system in the region. We examine balance sheets of 474 banks in East Asia for evidence on the bank lending channel of financial crisis transmission. We test whether the lending fell faster for banks with (1) a high reliance on money market funding and (2) a high exposure to the Lehman Brothers bankruptcy. We find a statistically significant correlation between loans growth in 2008 with the degree of dependency to the money market but not with the direct exposure to the Lehman Brothers. Interestingly, the importance of the lending channel of the transmission mechanism appears to vary across economies, possibly due to the differences in the nature of the relationship between banks and firms. Korean banks in our sample are relatively heavy on money market finance, and appear to be affected more by the Global Financial Crisis. In contrast, Japanese banks appear to have countered the shock by increasing lending, at least temporarily. Data limitations prevent us from offering strong conclusions for other economies, but the impacts on ASEAN countries in our sample would have been small except for Singapore. Most banks around the region rely largely on deposits as the chief source of finance so that the effects through the bank lending channel would have been quantitatively modest on average.