Strengthening Financial Sectors and Preventing Crises

Abstract

In the latter part of the 1990s, several emerging market economies, particularly in East Asia, had serious crises whose effects were felt worldwide. Large capital outflows were accompanied by major financial and economic distress in the region in a mutually reinforcing process. The problems spread across borders, as banks and other investors in developed countries fled from emerging markets. Deprived of funding, banks and other financial intermediaries in East Asia cut down credits and in some cases (for example, Indonesia) banks faced runs and many had to be closed down. This resulted in sharp devaluations, major falls in output, high unemployment, and large fiscal costs. Major financial markets also suffered, as fears spread about the exposure of various international banks to distressed emerging markets.

Tomás Baliño is Deputy Director of the IMF’s Monetary and Financial Systems Department. The author wishes to acknowledge the helpful contributions of Martin Cihak and Mark Swinburne in providing information about the state of the program and on recent developments in European countries, as well as their valuable comments.