- ADBI series on Asian Economic Integration and Cooperation
Edited by Masahiro Kawai, David G. Mayes and Peter Morgan
Chapter 9: The Role of State Intervention in the Financial Sector: Crisis Prevention, Containment and Resolution
9. The role of state intervention in the financial sector: crisis prevention, containment and resolution 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,...
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