Taiwan's Looming Banking Crisis

Abstract

Although it is unlikely that an economy such as Taiwan would face a balance of payments crisis of the type that hit Asia in 1997, institutional analysis suggests that the banking sector may be vulnerable to an internally driven crisis.

This study applies the threshold indicators approach of Kaminsky and Reinhart [Am. Econ. Rev. 89 (1999) 473] to evaluate the likelihood of a banking crisis in Taiwan. Seventy percent of the macroeconomic indicators signal a banking crisis. This percentage is close to that of Korea in late 1996 and is higher than that of Japan just before Japan’s banking crisis erupted in the Fall of 1997.

Keywords: early warning, bank, crisis, Taiwan

JEL Classification: G21, G33, G38