On the Risk Exposure of Asia Pacific Banking Industry

Abstract

Despite its potential benefits, financial globalization also carries some risks, especially for developing countries. The recent 1997 Asian financial crisis is such episode associated with a globalized financial system. In this paper, I examine whether there is any significant impact of the 1997 Asian crisis on the risk exposures of the banking sector for a group of Asia Pacific emerging markets. Using a conditional multi-factor asset-pricing model that allows time variation in the risk premiums, I find that the risk exposure increased during the crisis, with the greatest increase occurring for the crisis countries. However, the incremental increase in the risk exposure has diminished after the crisis. The evidence provided here indicates that the 1997 Asian crisis does not appear to have a permanent effect on the riskiness international banking industries, implying that the financial globalization is still beneficial, at least in the long run. Consequently, the main challenge for policy makers is to manage the integration process as to take full advantage of the opportunities, while minimizing its risks.