Financial Intermediary Distress in the Republic of Korea : Small Is Beautiful?

Taking the Korean experience as a laboratory experiment in systemic financial crises, the authors analyze distress in individual institutions among two groups of financial intermediaries. They pool together a group of large financial intermediaries (commercial banks, merchant banking corporations) and another group of tiny mutual savings and finance companies. Both the too-big-to-fail doctrine and the credit channel approach suggest that the probability of distress would be greater for small intermediaries. But the authors find that proportionately fewer small intermediaries were distressed than were large intermediaries. They offer two hypothetical explanations for this unexpected result: 1) Exchange rate exposure - a major shock to Korean intermediaries - was presumably negligible for the small financial intermediaries. 2) Small financial intermediaries allocated loans better, because of the "peer monitoring" natural to their mutual nature and deep local roots. Available data did not allow the authors to test the first hypothesis, but they did find support for the second one. Estimating a logit model, they find that the probability of distress was systematically smaller for the mutual savings and finance companies that stayed closer to their origins (for example, collecting many deposits as "credit mutual installment savings") and for those with a longer history of doing business in their local community.

Bibliographic Details

Main Authors:	Bongini, Paola, Ferri, Giovanni, Kang, Tae Soo
Language:	en_US
Published:	World Bank, Washington, DC 2000-05
Subjects:	accounting, agency problems, asset diversification, asymmetric information, balance sheet, bank examinations, bank loans, Bank of Korea, banking systems, bankruptcy, borrowing, capital adequacy, central bank, commercial banks, community banks, comparative advantage, competitiveness, cooperative banks, corporate governance, credit unions, damages, default risk, deposit insurance, depositors, deposits, devaluation, developed countries, early warning systems, economic development, empirical analysis, exchange rate, financial assets, financial crises, financial crisis, financial data, financial distress, financial information, financial institutions, financial intermediaries, financial ratios, financial risk, financial sector, fiscal year, government support, inefficiency, insolvency, interest income, interest rates, liquidity, managerial efficiency, merchant banking, merchant banks, moral hazard, net worth, now accounts, operating expenses, ownership structure, private banks, profitability, qualitative response model, rating system, recapitalization, regulatory capture, regulatory forbearance, regulatory infrastructure, retirement, return on assets, risk management, savings, small banks, state owned banks, stockholders, supervisory agencies, time deposits, total revenue, mercantile system, corporate culture, credit effectiveness, savings banks,
Online Access:	http://hdl.handle.net/10986/21584
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