No.51 Financial Restructuring after the 1997 Crisis and Impact of the Lehman Shock: Path Dependence of Financial Systems in Korea and Thailand

  • #Working Papers

After the 1997 Asian financial crisis, South Korea (Korea) and Thailand implemented financial restructuring in a similarly successful manner and regained the healthiness of their banking sectors. However, when the Lehman shock hit their financial markets in 2008, its impact on the two countries was quite different. Korea, which had performed better in the financial restructuring than Thailand, was driven to the brink of a second financial crisis in 2008 while Thailand weathered the shock easily. This paper addresses this paradoxical contrast from the path dependence perspective, focusing on different historical paths of formation and change of the respective financial systems. It concludes that the successful state-led financial restructuring in Korea fostered banks' propensity of active lending while the private sector-led reform in Thailand only reinforced banks’ conservative lending behavior. Furthermore, betraying the critical juncture theory, the severe economic crises helped reinforce the institutional legacies in the two countries, resulting in aggressive foreign borrowing by Korean banks and timid borrowing by Thai banks. These differences explain their contrasting vulnerability to the Lehman shock.

Keywords: financial crisis, path dependence, institutional legacy, financial system, Korea, Thailand

Author
OKABE Yasunobu
Date of issuance
January 2013
Related areas
  • #Asia
Topics
  • #Economic Policy
Research area
Economic Growth and Poverty Reduction
Research project