Discussion Paper

No. 2012-48 | September 17, 2012
Banking Systems, Central Banks and International Reserve Accumulation in East Asian Economies


This paper examines changes in the balance sheets of the banking system in five East Asian economies which were affected by the 1997 Asian Crisis. These countries have persistently accumulated foreign currency reserves since the crisis. This paper estimates the impact of reserve accumulation on some important balance sheet variables such as liquid assets, credits and deposits of the banking system by applying panel data techniques. Estimates using data from Thailand, South Korea, Malaysia, Philippines and Indonesia show that reserve accumulation has a positive impact on the liquid assets and deposits of the banking system, but not on credit flows, after controlling for the effect of other potential variables.

JEL Classification:

F31, E58, G21


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Cite As

Prakash Kumar Shrestha (2012). Banking Systems, Central Banks and International Reserve Accumulation in East Asian Economies. Economics Discussion Papers, No 2012-48, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2012-48

Comments and Questions

Aleksandr Gevorkyan - Banking systems in East Asian economies
October 04, 2012 - 04:51

This paper looks at the changing balance sheets structure for some Asian emerging markets in relation to international reserves accumulation. That is quite insightful and can be further refined in later work.

Monetary policy effectiveness comes to mind as a possible extension to the study.

Another aspect ...[more]

... of this panel study that may be further clarified is consistent aggregation method of the diverse assets and liabilities across different countries' banking systems.

Finally, a possible extension in terms of country groups research may be taking examples of Eastern European states; for two reasons:

1. as still relatively new to the international financial markets, they are largely following a traditional macropolicy (esp. smaller economies).

2. resource-endowed economies share experience of large reserves accumulation, stemming from resource exports revenues vs. banking system as the paper describes.

The latter may be a principal difference and it'd be informative to examine the dynamic.

Overall, the paper and the topic it's dealing with look promising.

Prakash Shrestha - Reply to Aleksandr Gevorkyan
November 11, 2012 - 16:37

Dear Aleksandr,

Thank you for your comments on my paper.

Yes, we can extend this paper in a number of ways. Obviously, we can examine in other countries. To begin with, I mainly concentrated in five East Asian countries which were seriously affected by the 1997 Asian financial ...[more]

... crisis, which is the turning point for increasing accumulation of international reserves in many emerging countries. The balance sheet structures of the banking systems and central banks in the selected five East Asian countries have changed as described in the paper. In this context, this paper mainly aims to look at the impact of international reserve accumulation on the banking system, particularly on the liquidity, private sector credits and deposits.

Regarding the consistent aggregation method of the diverse assets and liabilities across different countries, I have used the ratios of balance sheet's items in terms of GDP, which can be compared across the countries.

In another paper, I am studying the effectiveness of monetary policy amidst international reserve accumulations. Emerging countries, including developing countries, have their currencies not used in international transactions. They suffer from the external constraint. Hence, monetary policy has to consider not only internal macroeconomic stability but also external stability. I think that with ample stock of international reserves, monetary policy can have some leeway to deal with domestic macroeconomic stability.

Thanks again for your efforts and I would be happy to discuss further.

Anonymous - Invited Reader Report
November 01, 2012 - 08:53

see attached file

Prakash Shrestha - Response to Anonymous Invited Reader
November 11, 2012 - 18:51

see attached file.

Anonymous - Referee Report 1
November 02, 2012 - 09:21

The author analyzes the link between international reserves and liquidity of the banking system by estimating a panel data model on data for five Asian countries (Thailand, South Korea, Malaysia, Philippines, Indonesia). The model features several control variables, and a dummy variable to capture the effects of the Asian crisis. ...[more]

... Several robustness tests show that international reserves tend to have a positive effect on liquidity in the banking sector.

This is a concisely written paper and it seems that the author has undertaken the empirical analysis with care. I have some minor comments that may help to improve the paper.

In my view, the paper could be streamlined. The author may wish to present only the results of estimating the preferred model (the fixed effects model by feasible GLS, Table 10). The results summarized in Tables 7 and 8 are informative, but could be briefly described in the main body of the text or in a Technical Appendix. Diagnostic checks should be presented for the preferred model.

Sections 2 and 3 are way too long and should be shortened. At the same time, it would also be interesting if the author could explore in more detail the theoretical foundation of the empirical analysis. The paper already contains some references to the theoretical literature, but I think the paper would benefit if the author (i) could present them in a more compact form, and, (ii) link them better to the empirical analysis. In this respect, the author also should try to motivate in theoretical terms the choice of the set of control variables. It would also be interesting to motivate in more depth whether economic theory allows the signs and magnitudes of the coefficients of the empirical model to be interpreted.

In terms of the empirical analysis, Fig. 2 and Fig. 3 indicate that the links between the dependent variable and the explanatory variables may have changed over time. It would be interesting to test for structural breaks. Alternatively, it could be interesting to track changes in the coefficients by means of a rolling / recursive estimation-window approach. In terms of the empirical analysis, the author suggests in Section 5 to extend the empirical analysis by estimating a VAR model. I wonder whether this could be done in this research (by estimating a panel VAR model) to capture the potential interplay between the variables being studied. While such an interplay may not be a major issue because the author studies annual data, it could still be interesting to explore this possibility because, for example, liquidity in the banking sector may affect the rate of GDP growth (gr) via a financial accelerator. If so, such effects could help to better trace out the theoretical foundation of the empirical analysis.

Section 5 is somewhat disappointing as it mainly summarizes the empirical results. As a reader, I would like to read in the concluding a discussion of the implications of this research for developments in economic theory, for research on the stability of financial systems in general and banking systems in particular, and for debates going on in the policy arena.

In terms of references to the literature, the author may wish to link this research to (i) the literature on reserve accumulation and sterilization of capital flows in Asian countries, and, (ii) the literature on capital flows, monetary policy, and asset-price bubbles in Asian countries. The list of relevant papers includes, for example, Aizenman, J., and R. Gllick (2009). Sterilization, Monetary Policy, and Global Financial Integration. Review of International Economics 17: 777-801; Chan, K.S., and V.Q.T. Dang (2012), The 1997 Asian Currency Crisis, Financial Linkages, and the Monetary Policy of Japan. Review of International Economics, 20: 1-17; Caballero, R.J., and A. Krishnamurthy (2006). Bubbles and Capital Flow Volatility: Causes and Risk Management. Journal of Monetary Economics 53: 35−53; Cavoli, T., and R.S. Rajan (1998). Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization. Asian Economic Journal 20: 409−423; Sarno, L., and M.P. Taylor (1999). Moral Hazard, Asset Price Bubbles, Capital Flows, and the East Asian Crisis: The First Tests. Journal of International Money and Finance 18: 637−657; Kim, S., and D.Y. Yang (2009a). Do Capital Inflows Matter to Asset Prices? The Case of Korea. Asian Economic Journal 23: 323−348.

Prakash Shrestha - Reply to Referee Report #1
November 20, 2012 - 01:31

see attached file

Anonymous - Referee Report 2
November 19, 2012 - 12:29

see attached file

Prakash Shrestha - Reply to Referee Report #2
December 02, 2012 - 17:38

see attached file