Bank regulations, financial crisis, and credit crunch: The case of Thailand

The response of bank lending to a change in bank capital is crucial to the transmission of aggregate shocks throughout the economy. In Thailand, commercial bank lending contracted significantly when it was hit by the financial crisis of 1997. The contraction was made worse by the banking regulations (risk-based capital requirements and deposit insurance) that had been implemented earlier to promote a safe and sound banking system.; The purpose of this dissertation is to examine the credit crunch phenomenon in Thailand during the crisis in 1997 and find out whether the decline in commercial bank lending was made worse by bank regulations.; This dissertation develops a theoretical model of a bank's expected wealth. It is based on Peek and Rosengren's loan disbursement model (1995) but expands it to allow for government securities, bank regulations (risk-based capital requirements and deposit insurance), and the uncertainty relating to the bank's loan-repayment.; The model is tested against the data from a sample of ten Thai commercial banks and seven foreign owned banks operating in Thailand. The empirical results support the idea the hypothesis that bank regulations, especially risk-based capital requirements, contributed to the contraction of lending by the ten Thai banks. A similar impact is not found in the case of loans by the seven foreign owned banks.