Table of Contents

Implications of the Global Financial Crisis for Financial Reform and Regulation in Asia

Implications of the Global Financial Crisis for Financial Reform and Regulation in Asia

ADBI series on Asian Economic Integration and Cooperation

Edited by Masahiro Kawai, David G. Mayes and Peter Morgan

In light of the experience of the global financial crisis, this book develops concrete recommendations for financial sector reform and regulation in Asian economies aimed at preventing the recurrence of systemic financial crises, improving the ability to manage and resolve crises, managing capital flows and promoting the development of Asian bond markets.

Chapter 9: The Role of State Intervention in the Financial Sector: Crisis Prevention, Containment and Resolution

Yoon Je Cho

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation


Yoon Je Cho 9.1 INTRODUCTION The underlying theme of this chapter is an old and familiar, yet unresolved one: the roles of the government and the market in relation to a stable financial system and economic growth. Times of crisis call for extraordinary government interventions in the market, often through the direct ownership of banks and non-bank financial institutions (NBFIs). But these interventions need to address the issue of moral hazard and reduce the likelihood of a subsequent crisis. Interventions should also protect the interests of taxpayers, impose losses on the responsible parties and use the market as much as possible to pick the winners and losers. The ultimate objectives of government interventions are to address failures of and imperfections in the market, but the exposure of interventions to the risk of government failure must be considered as well. When markets collapse in times of crisis, the government is the only remaining option. Nevertheless, government interventions should be complemented by market incentives and principles. This chapter first briefly discusses the role of the state in crisis prevention (section 9.2), as crisis prevention is linked with containment and resolution. It then discusses the role of state interventions in the financial system for crisis containment and resolution (sections 9.3 and 9.4). The discussion of crisis resolution is based largely on the experience of the Republic of Korea (hereafter Korea) during the 1997–1998 Asian financial crisis. Finally, the chapter draws some lessons and recommendations from the Korean experience of financial crisis resolution...

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