S X ESEARCH **WORRKING** PAPER 2265

# Sum;tMary **findings**

' Ilitucs and regulatory capture can play an important e in financial inst-itutions' distress. East Asia's financial .r sis featured many distressed and closed financial 'r,ermediaries in an environment with many links 'ween governmernt, politicians, supervisors, and ancial institutions. This makes the East Asian financial cis a good event for studying how such connections a:,_ect the resolution of financial institutions' distress.

Bouigini, Claessens, and Ferri investigate distress and _c_ 'osure decisions for 186 banks and 97 nonbank financial instutions in Indonesia, the Republic of Korea, Ialaysia, the Philippines, and Thailand. They find that a er July 1997, 42 percent of the institutions experienced distress (were closed, merged, or re.apitalized, or hac their operations temporarily suspended). By July 1999, 13 percent of all institutions in existence in July '1997 had been closed.

Using financial dara for 1996, the authors find that: Traditional (AM\4EL-type variables - returns on assets, loan growth, and the ratio of loan loss reserves to capital, of net interest income to total income, and of loans to borrowings -- help predict subsequent distress and closure.

* None of the foreign-controlled institutions was closed, and foreign portfolio ownership lowered an institution's probability of distress.

"Connections" -with industrial groups or influential families - increased the probability of distress, suggesting that supervisors had granted forbearance from regulations. Connections also made - closure more, nor less, likely suggesting that the closure processes themselves were transparent.

* But larger institutions, although more likely to be distressed, were less likely to be closed, while (smaller) nonhank financial institutions were more likely to be closed. This suggests a "too big to fail" policy.

T'hese policies, together with the fact that resolution processes were late and not necessarily comprehensive, may have added to the overall uncertainty and loss of confidence in the East Asian countries, aggravating the financial crisis.

- - This paper a product of the Financial Sector Strategy and Policy Group, Financial Sector Vice Presidency is part of a iarger effort in the group to study the causes and resolution of financial distress. Copies of' the paper are available free trorn the World Bank, 1818 H Street, NW, Washington, DC 20433. Please contact Rose Vo, room MC9-624, telephone 202-473-3722, fax 202-522-2031, email address hvol@worldbank.org. Policy Research Working Papers are also posted on -he Web at www.worldbank.org/research/workingpapers. The authors may be contacted at pbonginiC2mi.unicatt.it, cclaessens@xworlcLbank.org, or gferri@worldbank.org. January 2000. (22 pages)

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