Safety Nets and Financial Institutions in the Asian Crisis: the Allocation of Within-Country Risk, by Robert M. Townsend. March 2002

During the financial crisis in Asian countries such as Thailand, macro-economic aggregates were used to portray the health or state of the impacted economy. Negative GDP growth was taken to indicate a fall in household welfare, for example. Initially high interest rate policies to encourage foreign (re)investment and subsequent expansionary monetary and fiscal policies were the result. On top of this, as commercial banks and finance companies were thought to be culprits in instigating the crisis, financial sector reforms were also implemented. The focus was on increasing capital adequacy ratios and the reduction of nonperforming loans. Finally, as yet another addition, safety net policies recognized that particular groups or sectors might be more vulnerable than others to downturns, if not to the adverse effects of tight policy. Thus, a government agricultural development bank was to be used as an engine of growth, and the government saving banks was to be used to promote village funds and small household business.