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Macro-financial linkages and bank behaviour: evidence from the second-round effects of the global financial crisis on East Asia

Abstract

This paper studies the link between macro-financial variability and bank behaviour, which justifies the second-round effects of the global financial crisis on East Asia. Following Gallego et al. (The impact of the global economic and financial crisis on Central Eastern and South Eastern Europe (CESEE) and Latin America, 2010), the second round effects are defined as the adverse feedback loop from the slumps in economic activities and sharp financial market deterioration, which may influence the financial performance of bank, inter alia via deteriorating credit quality, declining profitability and increasing problems in retaining necessary capitalization. Differentiating itself from other research, this study stresses adjustments in four dimensions of bank performance and behaviour: asset quality, profitability, capital adequacy, and lending behaviour, assuming that any change in a bank-specific characteristic is induced by endogenous adjustments of the others. The empirical results based on partial adjustment models and two-step system GMM estimation show that bank’s adjustment behaviour is subject to the variation in the macro-financial environment and the stress condition in the global financial market. There is no convincing evidence to support the effectiveness of policy rate cut to boots bank lending and to avoid a financial accelerator effect.

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Notes

  1. See IMF Country Report No. 10/288. Indonesia: Financial System Stability Assessment.

  2. See BIS paper No. 52: “The international financial crisis: timeline, impact and policy responses in Asia and the Pacific” by the staff at The BIS Asian Programme.

  3. The paper focuses on six ASEAN countries which were strongly affected by the 1997–1998 financial crisis and two financial centres of the region (Hong Kong and Japan) as they have played a very important role in the credit market of Asia.

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Correspondence to Chau H. A. Le.

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Le, C.H.A. Macro-financial linkages and bank behaviour: evidence from the second-round effects of the global financial crisis on East Asia. Eurasian Econ Rev 6, 365–387 (2016). https://doi.org/10.1007/s40822-016-0048-7

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  • DOI: https://doi.org/10.1007/s40822-016-0048-7

Keywords

  • Bank behaviour
  • Macro-financial linkages
  • Global financial crisis
  • Financial contagion
  • The second round effect

JEL Classification

  • G21
  • F61
  • F62
  • F65