Gauging procyclicality and financial vulnerability in Asia through the BIS banking and financial statistics

Summary

Focus

A review of the run-up to the 1997 Asian Financial Crisis underlines the usefulness of slow-moving balance sheet aggregates in signalling the build-up of financial vulnerabilities. We show how the BIS international banking and financial statistics might have been used in this way. We use the same statistics to look at current vulnerabilities in the global financial system.

Contribution

We put ourselves in the shoes of a contemporary observer during the run-up to the 1997 Asian Financial Crisis, using data available at the time. We reconstruct a narrative of events through a chart pack of banking and financial developments. We use the BIS international banking and financial statistics to show that international credit intermediation has shifted from banks to capital markets.

Findings

The BIS international banking statistics captured the build-up of vulnerabilities in the run-up to the Asian Financial Crisis. In particular, vulnerable economies could have been identified by combining information on the levels and growth rates of cross-border bank credit. The BIS data also reveal that the boom in international credit was fuelled mainly by short-term interbank lending denominated in US dollars. In recent years, debt securities have become an increasingly important source of funding for EME corporations and other non-banks.

Abstract

We look back at past episodes of financial stress in Asia with a forward-looking perspective. We put ourselves in the shoes of a contemporary observer with the data at hand and ask what evidence was available on the systematic build-up of vulnerabilities. We reconstruct a graphical narrative of banking and financial developments at the time. Our exercise showcases the usefulness of the BIS international banking and financial statistics as a window on the financial system's procyclicality. We conclude with a real-time forward-looking survey of current financial vulnerabilities, focusing on the implications of the shift in the pattern of credit intermediation from banks to bond markets.

JEL classification: F32, F34, G01

Keywords: Asian Financial Crisis, international bank lending, procyclicality, financial stability