Wook Sohn

Global Financial Stability and Regional Financial Arrangements

Since the start of the global financial crisis, financial markets and capital flows have been marked by a period of heightened volatility. In response, new resources have been committed to the global financial safety net (GFSN), and new approaches to crisis prevention and resolution have been developed. The GFSN now includes various multilayered arrangements in the form of official foreign reserves, currency swap agreements among central banks, regional financial arrangements (RFAs), and International Monetary Fund (IMF) credit lines—in other words, national-, bilateral-, regional-, and global-level arrangements. To promote high-quality research that develops a better understanding of the role of the GFSN and RFAs, an international conference sponsored by the Ministry of Strategy and Finance of Korea, Korea Development Institute, and the Society for the Study of Emerging Markets was organized. To have an opportunity to share those ideas in an academic context among experts and policy-makers, the Global Financial Stability Conference was held in Seoul, South Korea, from June 22 to June 23, 2015. This conference was organized in six sessions, each consisting of presentations and discussions. The first three sessions consisted of academic papers dealing with various issues in the GFSN. The fourth session concentrated on the role of RFAs at the time of an emergent crisis, on its sustainable development, and on how they can expand their roles for economic cooperation. Finally, in sessions 5 and 6, there were panel discussions on capital flow management measures and their experiences. There was a keynote speech on the strengthening of the GFSN. Among the papers presented at the conference, we have selected five papers, including the keynote speech, for this special issue of the Emerging Markets Finance and Trade. Through this special edition, we expect the readers can deepen their understanding of various levels of the GFSN, including their roles and challenges. The first paper in this special issue is the keynote speech by Choongsoo Kim. He shares his idea on the current global financial circumstance; whereas rapid financial globalization was a basic source of the systemic risks of the global financial crisis, the world economy is even more integrated in the aftermath of the global crisis. He emphasizes the importance of the global community to strengthening the GFSN to respond to a crisis. Kim argues that the GFSN should be a multilayered structure, and only a single layer alone would not be sufficient to handle the global crisis due to its impact of economic damage. More specifically, the author suggests a multilayered structure of the GFSN as follows: self-insurance with foreign exchange reserves, bilateral currency swaps by central banks, RFAs already influencing regional financial recourse and stability in several regions, and global arrangements, such as the IMF facilities. To conclude, the author holds a positive perspective of the GFSN, expecting that it can contribute to ease global imbalances and ultimately to crisis prevention and financial stability.

Banks’ lending decisions after loan acquisitions: do banks favour pre-existing relationships?

This article examines the lending decisions of Korean banks after they acquire loan portfolios from failed banks. We find that a firms pre-existing relationships positively affect the continuation of those relationships, and that pre-existing relationships negatively impact increases in loan size, once those relationships are maintained. These results suggest that banks have a conflict of interest that comes with pre-existing lending relationships, and that bank quality does not necessarily convey the risk classes of its client firms.

An Equity Market Perspective on the Korean Financial Crisis

Abstract We examine the movement of Korean stock prices before and after the 1997 financial crisis. Unlike in Japan, as documented by Hamao et al. (Journal of Money, Credit and Banking, 39, pp. 901–923, 2007), we find an increase in firm-level volatility in Korea, which may make it easier for investors to distinguish low-quality from high-quality firms and thus encourage “cleansing” during recessions. The result appears to derive from government efforts to restructure the corporate sector, which targeted highly leveraged firms and chaebol affiliates immediately after the market crash.

The ‘Twin Peaks’ model of post-crisis banking supervision

ABSTRACT This article examines the effectiveness of the ‘Twin Peaks’ supervision model, in which consumer protection and prudential regulation are carried out by two separate regulatory agencies. We use a dataset from 143 countries for the period of 2004–2011 to find that the Twin Peaks model is associated with a higher quality of banking supervision in terms of the efficiency and stability of financial institutions.

Are financial activities harmful for regional growth? Contradictory evidence from the Indonesian panel data

Using high-frequency panel data for Indonesian provinces, we find that financial activities are associated with slower growth rates of productivity and output per capita. In particular, bank credit alone appears to inhibit growth more than the impact of credit and financial savings combined. This result contrasts starkly with the evidence from low-frequency panel, where the estimates suggest that bank credit promotes faster productivity and higher growth of per capita output. The contradictory evidence is attributable to the nonlinear growth dynamics of the finance-output nexus, where credit inhibits growth in the short run and promotes growth over the longer haul.

Factors driving the prompt corrective action of supervisory authorities: : Evidence from Korea’s savings banks

Abstract: Korea’s savings banks that expanded their number of high-risk loans experienced defaults after the 2008 global financial crisis. We consider the prompt corrective action (PCA) to analyze factors that drive savings banks to failure given that an order for PCA by a supervisory authority normally leads to default. We conduct discrete choice models to estimate the probability of PCA using 2005–11 data on 103 Korea savings banks. We find that the postexamination actions taken by supervisory authorities and a rapid increase in loans increase the possibility of PCA. These results suggest that depositors and the market can reduce the costs incurred from defaults by identifying information that predicts PCA.

The impact of Medicaid's preferred drug lists on physicians' prescribing behaviour

This article examines Medicaid preferred drug lists (PDLs), a cost-containment tool that designates specific drugs for use by Medicaid beneficiaries. We develop an empirical model to measure the direct and spillover effects of Medicaid PDL across Medicaid, cash and third-party payer markets; and apply product level panel data to the cardiovascular market in Illinois and Louisiana. We find a significant decrease in post-PDL Medicaid prescription shares of drugs excluded from the PDL. Spillovers onto third parties and the cash market are also statistically significant. Moreover, a more restrictive prior authorization procedure has a greater impact on prescription shares. There is evidence of gradual adjustment in prescription shares. Lastly, the impact of PDLs is stronger among physicians with a higher share of Medicaid prescriptions.

Closing inefficient affiliates: evidence from Korean conglomerates

In the wake of the financial crisis, the Korean government and creditor banks announced a ‘blacklist’ of 55 firms to be forced to exit the market. This article examines the effects that the closed affiliated firms had on stock market values of the Korean business groups (chaebols). We find that the announcement had an immediately negative effect on the remaining affiliates. The announcements adverse effect became worse as firms had more affiliates in the ‘blacklist’ and had more investment from them, after controlling for various firm characteristics. These results suggest that the corresponding chaebols had financially weak firms besides those in the ‘blacklist’, or that the affiliates could not recover their investment when the blacklisted firms were closed.