IMF bailouts, contagion effects, and bank security returns

Abstract

The Asian financial crisis that started in mid-1997 led to the International Monetary Fund's (IMF) bailout of three previously high growth economies: Thailand, Indonesia, and Korea. Using data for 114 large banks from 16 countries worldwide, we study the impact of the IMF bailout announcements on bank security returns. The announcement that the IMF will provide a rescue package for a country has a positive impact on domestic bank stock prices in the countries receiving the bailouts, which supports the view that these bailouts help ameliorate systemic risk. Our results show that banks in the nonbailout countries generally experience either insignificant or negative abnormal returns, which is contrary to the view of opponents of IMF bailouts, who argue that these bailouts lead to moral hazard among international banks. Our results support the view that the reaction of investors differs from bank to bank, but consistent with the contagion and the heterogeneous creditor hypotheses, banks' stock price reactions are not proportional to their loan exposure.