The political economy of distress in East Asian financial institutions

The 1997-1999 East Asian crisis is an interesting case for studying the det erminants of distress and closure of financial institutions. Of a sample of 283 financial institutions from Indonesia, Korea, Malaysia, the Philippine s, and Thailand, 120 experienced distress, and by July 1999, 38 were closed . We find that traditional, CAMEL-type financial data for 1996 help predict distress and closure. "Connections"-with industrial groups or influential families-increased the likelihood of distress, however, suggesting that sup ervisors had granted selective prior forbearance from prudential regulation s. Since closure was more, not less, likely with connections, the closure p rocesses themselves appear transparent. We also find evidence of "too big t o fail" policies.