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Public Policy Brief No. 44 | September 1998

The Asian Disease: Plausible Diagnoses, Possible Remedies

Regulation of Cross-border Interbank Lending and Derivatives Trade

Asia presents a cumulation of apparently rational decisions that produced disastrous results—a textbook illustration of “financial instability” developing from the economics of euphoria. A combination of factors produced the crisis as enormous capital inflows were drawn to the “Asian miracle“-pegged exchange rates with fluctuating interest rates, integrated economies, moral hazard created by central banks, and short-term lending and derivatives trade without sufficient evaluation of risk and credit analysis of borrowers. The Asian tragedy demonstrates the need for improved regulation of cross-border interbank lending, improved accounting for both borrowers and lenders, and separation of the close links between governments and their banking sector.

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Author(s):
Martin Mayer

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