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CHAPTER 3 International Bank Lending and the East Asian Crisis Jacques Cailloux and Stephany Griffith-Jones There is a structural fault in the nature of capital flows. Short-term debt flows, especially bank finance, are highly volatile. Unless the problem is tackled the potential for future crises will remain. -Mervyn King There is growing agreement that an excessive build-up of short-term debt was a proximate cause of the recent crises, particularly in East Asia. -Dani Rodrik and Andres Velasco As was discussed in chapter I, the proximate cause of the crises in East Asia was a sharp reversal in capital flows, and the dominant category in the reversal of these flows was bank credits, which represented 92 percent of the outflows in the four most affected countries during 1997 and 1998 and 72 percent of the reversals between 1996 and 1998 (see table 1.2 in chap. 1). As we also highlighted, a particular feature of bank lending to East Asia was that a very high proportion of those loans was short term. This implied a large accumulated stock of short-term debt (particularly bank debt), which made the East Asian countries particularly prone to large reversals. We have noted that the higher the stocks of liabilities the higher the scale of potential outflows; this is particularly true for short-term bank debt, for which the potential for reversal is extremely high, as creditors have the simple option of not renewing loans. As the empirical analysis of Radelet and Sachs (1998) and particularly Rodrik and Velasco (1999) confirm, short-term debt (and especially short-term debt to banks) as a proportion of reserves is a strong predictor of both the likelihood and the severity of crises. There has been surprisingly little detailed empirical analysis of the nature and causes of reversals of bank loans to the East Asian countries, for example, by nationality of banks and by individual banks (an exception is Kaminsky and Reinhart 1999). Given the importance of these flows and their reversal in 49 50 International Capital Flows in Calm and Turbulent Times East Asia, we develop such a detailed empirical analysis here, which gives us a basis for a more in-depth examination of the causes of these large reversals. In section 1, we present the broad picture ofbank lending to East Asia, focusing on the main players. Section 2 then analyses the different reasons behind the rapid buildup of short-term external debt. Section 3, in turn, presents some explanations for the withdrawal of bank loans. 1. RECENT TRENDS IN BANK LENDING TO EAST ASIA In this section, we analyze the maturity structure and sectoral distribution of bank loans and then examine the behavior by creditor banks' nationality. Our analysis focuses on the period between the end oOune 1995 and the end of June 1999 and draws on data published by the Bank for International Settlements (BIS). 1.1. GLOBAL TRENDS TO EAST ASIA As can be seen in table 3.1, international lending to East Asia (Indonesia, South Korea, Malaysia, and Thailand) rose sharply during the years just preceding the crisis. However, it is worth underlining that the stock of external debt at the beginning of the 1990s was fairly small in all four countries (with TABLE 3.1. International Claims on the Asian-4 by Nationality of Reporting Banks (in billions of U.S.$ and percentages of total lending) Local Total Japan EU U.S. Subsidiaries Bn U.S.$ Bn U.S.$ % Bn U.S.$ % Bn U.S.$ % % End ofJune 99 160.6 53.4 33 66.5 41 12.4 8 18 End of Dec. 98 171.7 62.4 36 70.4 41 12.0 7 16 End ofJune 98 192.5 72.0 37 76.4 40 13.5 7 16 End of Dec. 97 239.0 84.0 35 88.1 37 18.8 8 20 End ofJune 97 261.1 95.1 36 92.0 35 20.9 8 20 End of Dec. 96 247.9 92.1 37 83.1 34 22.0 9 20 End ofJune 96 226.8 89.8 40 70.9 31 19.5 9 21 End of Dec. 95 201.7 86.6 43 59.8 30 16.0 8 19 End of June 95 180.2 80.1 44 57.8 32 13.6 8 16 Source: BIS, The maturity and sectoral and nationality distribution of international bank lending, various issues. Note: The total in the first column also...

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