The Financial Crisis and Systemic Risks in Asia Pacific Banks: An Evaluation of Policy Responses

Abstract

This paper examines the effects of the 2008 financial crisis on the Asia Pacific banking system and the policies that the local government authorities implemented in response to the crisis. We use descriptive statistics to examine capital adequacy and loan quality in the Asia Pacific banks. We show that the extent of spillover effects of the crisis on the Asia Pacific banking industry is associated with the trade-off between financial liberalization and financial stability; there is a linear relationship between foreign bank participation and cross-border loans in the Asia Pacific economies. We also conduct an event study to examine the systemic risks in the Asia Pacific banks. Particularly, we find that the CDS spread started to converge in 2009 after the implementation of stimulus packages and assertive policies in the Asia Pacific countries, implying that the policies adopted by the regional governments had at least some immediate effectiveness in helping banks decentralize the international financial shocks.