Various factors were at play during the crisis and it is likely that a confluence of factors were responsible for

the events that occurred. The various causes presented below are not meant to be taken in isolation but have been identified as some of the more significant components that may have led to the emergence of the crisis.

Prior to the crisis, the emerging economies of East Asia recorded real GDP growth rates that were among the highest over a sustained period for any region in the world. Nominal GDP per capita increased at a rapid and steady rate while unemployment rates dipped to historical lows. This rapid and sustained growth was achieved with relatively modest levels of inflation (see table below).

However, during the period immediately prior to the crisis, some imbalances began to appear in the external sectors of the East Asian economies. These were characterised

However. However. Specifically. Hence. excess liquidity may well be channelled into asset markets and. Existing structural weaknesses (see next section) allow this credit boom to be sustained and can also lead to the mis-channelling of capital inflows towards non-tradable and speculative sectors such as the real-estate and equity markets.by. Global capital flows afforded developing countries the opportunity to smooth their consumption and investment patterns and also brought along with them the accompanying benefit of "knowledge spill-over" and improved resource allocation. among other things.1. slowing export growth. and potential vulnerability . led to the start of the most recent episode of private capital flows to developing economies. The East Asian crisis appears to suggest that initial conditions not only matter but are crucial in ensuring that developing countries can successfully tap the benefits of private capital flows while shielding themselves from the accompanying risks. Figure 9: Capital flows. real-exchange-rate appreciation. fuel an asset price bubble. the vulnerability of the macroeconomy to sudden reversals in capital flow also increases significantly. at this stage. and increasing short-term external debt. a cyclical downturn in global interest rates coupled with the search by international investors for higher yields and diversification opportunities. the macroeconomy is in no shape to absorb the adverse shocks associated with this portfolio readjustment and a crisis ensues (see figure below). a "virtuous" cycle continues until some "trigger-event" occurs-some exogenous shock such as the baht devaluation-causes investors to reassess and readjust their portfolios across a number of markets. careless monetary policy and an asset price bubble. This combination of a credit boom. poor governance. lax fiscal policies and non-sterilised inflows-can result in a credit boom in the recipient economy. It has been argued that capital flows can be related to economic vulnerability along the following lines. thus. large current account deficits. geographically and by asset. MACROECONOMIC ISSUES 2. mis-allocated funds. driven by a surge in capital inflow. monetary aggregates to increase. lending booms. can increase the local currency denominated wealth of the economy. according to this analysis wweak initial conditions-among them. inadequate supervision and regulation-as well as inappropriate policy responses to initial surges in capital flows-for example. Moreover. it is argued that capital invasion in a regime of relatively rigid exchange rates-regimes that tend to be favoured by many developing countries as a means of providing a nominal anchor for the domestic price level and/or maintaining a competitive export position-can cause. among other factors. inflationary expectations and real exchange rate appreciation. in the absence of sterilisation.2 Capital Flow Surges In the early 1990s. On the macroeconomic front. This can feed economic activity.

and tried to sterilise inflows. structural weaknesses and implicit public sector guarantees (see the next section for further elaboration) are thought to have allowed the easy credit to channel resources to non-tradable sectors. 2. or it . there was significant excess capacity in those sectors. In most of these cases. Many emerging markets that received large capital inflows in the early 1990s appear to have experienced a concurrent expansion in their monetary aggregates. borrowing foreign exchange and investing them in projects with significant gestation periods which earned domestic currency because they were in non-tradable sectors. In one jurisdiction over-investment occurred in sectors which.3 Monetary policy that led to overheating economies At the same time. were experiencing declining demand.Source: World Bank The figures in table 3 lend support to the framework above. even though they were traded. capital inflows would have led to an expansion of monetary aggregates given the fixed or highly managed exchange rate regime that had been adopted by most of these economies. This would have given rise to significant currency and maturity mismatches which significantly increased the vulnerability of the recipient economies to adverse external shocks. given the high implied quasi-fiscal cost associated with sterilisation. although in many cases this was either incomplete.1. Therefore. in essence. Recent episodes of private capital flows have indeed resulted in significant credit booms in recipient economies. What this seems to suggest is that the economies receiving capital inflows were.

however. In some emerging markets. . the output gap-defined as the excess of actual output over potential as a percentage of potential output-has been positive for sustained periods and which has in turn led to inflationary pressures. The rapid expansion of the economies also led many of these countries to run significant current account deficits. along with the credit boom and resultant high rates of investment rates. A direct consequence of the monetary overhang.encouraged further short-term inflows. appear to have been rapid and sustained economic expansion. appear to have been channelled into the stock market and also non-traded sectors with fixed supply. A substantial proportion of these pressures.

and the fact that they are. the central bank had eventually built up significant short-term foreign obligations which had arisen from forward contract positions taken in defending the currency during the crisis. reporting requirements and prudential regulations. there is some concern that certain OTC instruments facilitate excessive risk-taking by market participants. so-called "hedging overhangs". with the crisis. While there is some debate as to whether they encourage market participants to assume too much risk. While some have argued that much OTC and off-balance-sheet activity is. moreover. their ability to facilitate complex speculative positions. measurement and disclosure. OTC instruments were responsible for an accumulation of official short-term foreign debt. First. they facilitate the taking of speculative positions. Thus. margin and collateral calls on derivative-based positions may force the liquidation of both derivative and underlying positions. Volatility may also beget volatility: in times of heightened price fluctuations. may have contributed to the severity and dynamics of the current financial crisis. such instruments might also enable market participants to circumvent prudential regulations or controls. which requires the purchase of underlying assets when markets rise and their sale when markets fall. and thus allow them to assume more risk than they otherwise could have. Moreover.2. by affording leverage and low transaction costs. in fact. suggests that the use of overthe-counter instruments (in particular. in which hedging transactions are undertaken by many market participants simultaneously. through particular features such as complex pay-off structures and cross-border components. thus effectively hiding the financial system's true exposure to market and liquidity risk from authorities. Survey responses have suggested that OTC products may have played a significant role in the massive build-up of private short-term foreign debt in several emerging-market jurisdictions. Related to this. For example. It has also been suggested that the use of such off-balance-sheet products has complicated . it has been argued that if designed in particular ways. It was reported that in this jurisdiction. and this can lead to a reduction in market liquidity and can generate valuation uncertainties. Second. there is some concern that their use can exacerbate short-run price volatility. the strict assumptions underlying derivatives pricing and trading can become invalid during times of severe market stress. they amplify the risks associated with holding them for the potential of much higher rewards. while in itself unlikely to have triggered market disruption. One survey respondent acknowledged that. opaque to accounting recognition. financial authorities in certain Eastern European and East Asian jurisdictions are reported to have taken or have considered taking measures against a form of OTC currency derivative known as non-deliverable forwards (NDFs) that are said to have played a role in heightened volatility of domestic currencies and securities. A recent report by the Basle Euro-currency Standing Committee identifies several ways in which this may occur. in at least one other jurisdiction. by and large. can accentuate an initial priceshock through positive feedback effects. among other factors.3. Moreover. may trigger large price movements. and that their use may have had a similar effect on the recent crisis in Asia. The continuous revision of hedge positions ("dynamic hedging") of short options exposures. can be opaque to on-balance-sheet accounting techniques. financial institutions under its jurisdiction were exposed to greater risks from their off-balance-sheet transactions. It is argued that this makes it easier for market participants to circumvent (or at least only partially comply with) domestic capital controls. prudent and proper. it has been suggested that the use of such products exacerbated both the European exchange-rate mechanism crisis of 1992-93 and the Mexican peso crisis of 1995-96. it is generally accepted that such instruments make it relatively easy for users should they wish to do so. This is because. derivatives) and off-balance-sheet items.2 OTC and off-balance-sheet activity The response of several emerging market authorities. These concerns tend to stem from the relative ease with which such instruments can provide leverage. others have raised specific concerns relating largely to the difficulty in monitoring such activity-compared to that which takes place on-exchange for example. A third area of concern that has also been identified is that OTC instruments. and hence amplify risks. Moreover.

3 Financial contagion If nothing else. as well as of 46.47 direct and portfolio investment from abroad.the distinction between traditional measures of long. While there have been various factors identified as potentially specific causes of the crisis. the sequence and breadth of events in 1997 underlined a consequence of an increasingly globalised and integrated financial system. 2.and short-term foreign debt exposure. the scope and the extent of the East Asian crisis cannot be adequately addressed without examining the role of financial contagion. .3. Indeed. 1997 provided striking evidence of the power of financial contagion in today's environment.

The issue of contagion can be addressed at two levels. As a consequence. as a consequence. how volatility in one market is transmitted to another market within the same economy. the speculative pressure in the currency markets of some EMC jurisdictions were so severe that central banks there resorted to imposing restrictions on swap transactions. contagion can be addressed at the crossmarket level. resulted in an increase in the relative competitiveness of these economies vis-à-vis other emerging market economies. cross-country contagion effects and the channel(s) through which it occurs. Malaysia and the Philippines which bore the slightest resemblance to that in Thailand came to be viewed in the worst possible light. investors' risk aversion jumped by quite a few points higher and. However. Estonia. In essence. The realisation of profits and losses from speculative positions in the past can lead to shifting in such positions that increases the probability of another depreciation. One view is that the troubles in Thailand which began in the second half of 1996 and culminated in the floating of the baht on July 2nd 1998 acted as a "wake-up call" to investors who had been excessively euphoric over the fundamentals of emerging market economies. Korea. on the face of things. This can aid in the transmission of the selling pressures across geographical markets which. the collapse of a speculative real estate bubble in Bangkok which surfaced in the guise of the default of the Somprasong Land Euro-convertible in January 1997. this inadvertently translated the demand for domestic currency to selling pressure in the equity market as currency speculators-in a bid to circumvent the central banks' restrictions-used the equity market to raise the funds needed to cover their respective short-currency positions. The rapidly collapsing currencies and rocketing interest rates coupled to erode the portfolio values of equity investors. from the currency market to the securities market. would otherwise seem totally unrelated. However. liquidate positions in markets which are barely affected and geographically removed in order to raise liquidity in anticipation of margin calls of a significant wave of redemptions. The initial devaluation of the Thai baht and some other currencies within the East Asian region resulted in real exchange rate depreciation of these economies. At the cross-market level. it is thought. a clear consensus which appears to be emerging is that bilateral trade links and investment shares alone cannot account for the scope and the scale of the contagion. In terms of cross-country contagion. South Korea. it has been argued that this rush to . the currencies of other emerging markets became increasingly over-valued vis-à-vis the economies which have undergone a devaluation and hence. Weaknesses that had been overlooked. but the notion of defaults on Thai property loans rocking the currencies of. among others. as a major link.The financial turbulence may be traced through a chain of financial events that include. came under pressure themselves to depreciate. that is. The fourth view of cross-country contagion is the so-called "demonstration effect" of profits and losses on speculative positions. The countries of East Asia have experienced numerous financial crises in the modern era. ignored or justified on the basis of expected returns were from then on viewed with greater scrutiny. This occurs when equity funds. A second view is that the differences in liquidity over time and across markets also led to what the BIS has termed "proxy hedging". in response to a market crisis in a particular geographical region. In an effort to understand the reasons for cross-country contagion effects and the channels through which it occurred. ie. contagion can be addressed at a broader level. For example. any situation in Indonesia. This however. The first wave of exchange rate volatility awakened domestic corporations with unhedged foreign currency exposure to their speculative positions and the urgency of hedging. various views have been advanced. Another channel through which the volatility in the currency markets spilled over onto equity markets was via central banks' operations to defend the domestic currency by raising interest rates. The third view concerning the mechanism of transmission has been defined as the "dynamics of devaluation". Firstly. Secondly. and Brazil would have been regarded as fanciful less than five years ago.

In an emerging market. tended to have little directed lending. In the year 1997 the fall in the Baht made Thai exports cheaper to foreign buyers. Consider the Thai devaluation. A widening of bid-ask spreads on the indicated prices of currency options in Asia suggested that the availability of such hedges diminished rapidly just when they were most in demand. Last is the question of why some economies proved more resilient than others to the East Asian crisis. For countries such as Indonesia that compete in export markets with Thailand.7 n.3 Unaffected economies 10.6 8.7 9.2 13.7 6.4 6.4 7. were not fuelled to the extent that they were in other more affected economies. while competitive. Table 6: Key banking sector indicators in East Asia NonBank capital as a performing Property lending percentage of loans ratio. for example. % Affected economies Indonesia Thailand South Korea Malaysia Philippines Hong Kong. institutional strength and governance in these economies are generally accepted to be stronger and more established compared to the worst afflicted economies.6 n. it is useful to identify the different ways by which contagion can spread.1 5.1 n.2 18 17 9.a. Lastly.7 2.a. selloff many channels seem to be working at once particularly when new information hits the market. n. Many observers credit this to the presence of stronger financial sectors and better banking supervision in these economies.2 n. 3. Nevertheless. It is also worth recognizing that sometimes what appears to be contagion is just separate markets reacting to a common externality shock. . 16 21.5 26.a. their banking sectors.7 12. while not altogether absent. % % total lending. to the 1994 rise in US interest rates or to the oil prices increases of the 1970s.a. Implicit guarantees were perceived to be minimal and supervision more effective. as a percentage of total assets. % Source: Goldman Sachs CHANNEL OF CONTAGION Distinguishing among the channel of contagion can be hazardous. SAR Taiwan Singapore China n.6 Country Vacancy rate for office space. 2.hedge only caused further depreciating pressures on the respective currencies. 3.8 25 n.4 19.a. For example.9 8.a.9 23.a. 10. Credit booms. 8 37.2 3. Trade Links Trade links provide a natural channel for financial contagion.7 13.6 8.

The Baht’s devaluation also raises the cost of imports in Thailand which reduces Thai imports from.that means foreign demand for exports falls as importers in the US and Japan switch to the now cheaper Thai goods. Investors who expect the Indonesian currency to depreciate rapidly in the future will sell Rupiah that they hold. increasing Indonesia’s trade deficit. the impact of such actions by foreign asset managers can be dramatic. That occured in October 1997 when US investors in emerging market mutual funds sold their shares in response to falling markets in Asia. reducing the Brazilian Central Bank’s stock of foreign reserves and making Brazil a target for attack. Also. contagion may spread through financial channels. Thai import demand fell by even more than the devaluation along would suggest. Korean investors liquidated holdings of Latin American Eurobonds in order to cover their dollar obligations. for example. This situation raises the Lao current account deficit and puts pressure on the Lao currency. Of course. which will cause prices for Indonesia’s export to fall. even with no change in fundamentals. which reduces confidence in the currency and makes Indonesia an easier target for currency traders betting on a Rupiah devaluation. because the Thai devaluation was accompanied by a Thai recession. Those sales can precipitate a sudden devaluation right away. As prices on Brazilian and Argentine dollar-denominated bonds fell. Lower exports imply an increase in Indonesia’a current account deficit – a fianancing gap that Indonesia must make up by borrowing more overseas. Brazilian banks that had purchased the bonds on borrowed funds were forced to sell Brazilian local currency denominated assets for dollars. In December 1997. If foreign investors are unwilling to expand Indonesia implicit line of credit. It is sufficient for investors to expect that they will rise. reinforcing the contagion effect. From the perspective of financial markets. But a reduction in reserves leaves Indonesia with fewer dollars to defend the Rupiah. as Republic of Korea came under attack. even though Thai exports did not rise immediately after the baht devaluation. Asian Financial Crisis and Subprime Crisis: A brief comparative study By andrewanalysis Introduction: . Financial Channels Liquidity Effects Even when trade links to the crisis country are insignificant. These episodes show how sudden drop in liquidity brought about by falling prices for one kind of asset may induce a fire sale of other assets. Indonesia must cover the financing gap out of its foreign reserves. Laos. Global investors within crisis countries also spread bear markets. In Latin America’s relatively thin markets. it is not actually necessary for Thai exports to rise. Fund managers in turn sold appreciated Latin American stocks to meet redemption orders rather than selling depreciated Asian shares. Indonesia was quickly affected.

relaxed credit requirements on the loans it would purchase from other banks and lenders. At the same time. rating them with the credit rating agencies. The US kick-started the build up of both these events but the bank was the common source of contagion for the spread. US: the originator for both crises.Economic crises are similar to occurrence of cancer in the human body. hoping that easing these restrictions would result in increased loan availability for minority and low-income buyers and that time was the birth of securitization. Bank: the common source of contagion . the American Mutual funds also started pouring in capital into the same region. it attempts to understand the rise of both crises by understanding the effectiveness of regulation. After that. SPC started with the investment banks and securities firm buying the mortgages from lenders. with the poorly rated and highly risky ones parked in their ‘warehouses’ that are known as ‘Special Investment Vehicles’. Along the timeline. please refer to theappendix A1 and appendix A2 as this paper attempts to focus on understanding the ‘genotype’ of both crises by finding looking for the originator and the source of contagion. They shared similar characteristics but are unique on their own. the presence of moral hazard and the triggering mechanisms. the nation’s largest home mortgage underwriter. AFC started with ASEAN countries opening up their market to attract foreign capital that eventually flow to build up asset bubbles that burst when their economies were not competitively overtime to sustain the high interest rates to support their fixed exchange rates. The US seems to be the originator for both crises.(World 1997)This is the new beginning of the miracle economic growth in the ASEAN region and also the start of the AFC. In 1999. under pressure from the Clinton administration. The Asia Financial Crisis (AFC) and the Subprime Crisis (SPC) exhibit ‘Mosaics’ type Propagating Mechanism. For more details on the respective mechanism. Different cells emerged from the same zygote. This eventually parallel a maturity mismatch like that of commercial banks which resulted in the Great Depression in 1930s. it is calledmosaicism. packaging and eventually selling them to investors as collateral debt obligations (CDOs). they also sold related derivatives to the market on the CDOs. the paper attempts to discover the phenotype by understanding the unique expression of the crises in terms of their spread pattern and spillover effects. (Altman 2008) The unintended consequences of both these events started to unveil the beginning of the subprime crisis. Here they took on the long term CDOs as assets and acted as counterparties to insure the value of the CDOs by keeping the short term premium as liabilities. The consequence of the Plaza Accord of the 1985 where US pressured Japan to appreciate Yen against the dollar to relieve the trade deficit with Japan lead the massive inflow of capital from Japan to ASEAN countries. Cancer occurs when cells from the same genotype mutate. Fannie Mae. Last but not least.

(Demyanyk 2008) data indicate that the debt service to income ratio is increasing over time. authorities did not impose effective regulation to anticipate their policy implementations. the lax regulation also occur upstream of the value chain in this industry. the SEA countries set up high interest rates to keep & attract foreign . Prior to floating the exchange rate. This probably implies that the lenders are getting more lax in issuing loans. Prior to AFC. The structure of the mortgage bankers’ incentive is skewed to cheaply supplying the loan. The complexity of the mortgage drives inadequate borrowers to take up these loans. (Demyanyk 2008)result indicate that a significant and systematic decline in the implicit credit standards remain after controlling other factors. Although the federal trade commission is there to enforce the consumer protection laws[1] . In addition. (Tai 2004)empirically proved that bank is a major source of contagion during the AFC. The US system was growing on eroding credibility of the value that the investors are buying into. In addition. Credit standard is a key factor for creating the SPC bubble. It was after the subprime crisis. By having consistent low interest rates and lax regulation on the derivative markets. the existing consumer protection legislation is not effectively enforced to ensure loans are given to informed borrowers who are aware of their loan payment capability.However. In the US. which eventually lowered investment and ignited staff redundancies. the combined loan to value ratios is rising and the falling share of fixed rate mortgages. The bank could not have become the medium of both economic pandemic if regulation promptly comes in to reduce risk and contain the spread. SPC began with the deteriorating quality of lending and rating of the mortgages while the AFC began with the intermediation of borrowing foreign currencies and lending local currencies to local enterprises who are not utilizing these loans effectively. Effectiveness of Regulation Both crises present a situation that the government intention to improve welfare stirred unintended disasters. the US policies was promoting asset value rather than promoting affordability which could be the alternative definition for increase homeownership. These ratios basically mean that the lax lending practice lead to increasing risk which move from the main street to the wall street and institutional investors. Eventually the risk escalated into realized losses that cause the financial market panic that affect enterprise. Commercial banks were later allowed to authorise foreign exchange transactions without the approval of the Bank of Thailand (Rao 1998). The US policy goal for increase homeownership is getting everyone to get a home by allowing low interest rates and liberating the financial market. no one was actively policing the occurrence of fraud on the mortgage market and that also reinforced the distortion of the value of these mortgages to the investors. Prior to the AFC in 1990. the SEA countries did not actively monitor and regulate the capital inflow & outflow when they allowed foreign players to be significant participants in the domestic banking operation. that the US Treasury proposed creating the mortgage origination commission. Moreover. (LP) data indicates that aggregate delinquency and foreclosure rates on subprime mortgages indicate that the default rates on the 2006 and 2007 vintages far exceed the rates observed on the earlier vintages. the manner of spread for each crisis is unique. Thailand in particular liberated its exchange controls in the midst of attracting foreign capital inflow to boost economic growth. Adverse selection cost is not imposed on the loan underwriter.

The moment. The situation is unique for US during the SP crisis because the bulk of US Treasury bonds and foreign investment belong to China who not only depend heavily on US consumer’s economy but also has yet to develop strong domestic consumption behaviour. The rating of these agencies affected the value of the potential revenue of their customers so indirectly affecting their revenue given that this industry is an oligopoly. With moral hazard. Had the government guided the direction of these capitals into sectors such as education. Given that the ASEAN government giving high interest rates & liberating the financial sector without properly regulating the allocation of foreign investment in the private sectors. On the other hand. Yet Thailand experience significant devaluation and foreign capital flight during the AFC and that was not seen in the US during the SPC. adverse selection and uncertainty in place. Hence there is still greater doubt on whether the agencies are impartial and independent. One could argue that there will be no perfect regulation and water tight supervision to guard a dynamic and evolving financial market because there will always be the moral hazard. adverse selection effect can be minimised with stronger surveillance policy and audits. Credit rating agencies can seek payment from the government or central bank but there will be market efficiency issues. Unlike the previous moral hazard dilemma. the country will be able to stay competitive by offering high value added goods as competition heats up for commodity goods among China and Vietnam. if the credit agencies get investors to pay for their rating.investments. such actions prompted short term investment horizon & eventually led to the creation of asset bubble in the financial asset market. Thailand Budget deficit during the AFC was significantly lower than the US during the SPC. Moral hazard Moral Hazard occurs prior to SPC when Investment Banks were paying the credit agencies to rate their products. there would be free riding issues. Therefore this presents a dilemma for the financial market to be efficient in term of pricing risk and return of these fixed income products. Moral Hazard also occurs prior to AFC when bank managers were lending based on political or personal interest rather than proper evaluation of risk and return (Rao 1998). This is because the bank can buy and distribute on behalf of their clients and potentially limit the earning capacity of these profit-driven agencies. a trigger is just needed to ignite market panic. Triggering Mechanism: The triggering mechanisms of these crises differ in their impact and manifestation. investor sustain a confidence crisis that their investment are not getting expected return upon considering that the Central Bank cannot sustain high interest rate for its fixed exchange rate given excessive real . technology and manufacturing.

magnitude and penetration power. SPC affected everyone including Asia. SPC has a relatively greater impact on economies than AFC in terms of spread. In addition. induced SPC. The America even benefits from capital flight from the AFC (Loser 1998). AFC did not significantly affect the North American economy because of strong domestic demand and low inflation rate. Eventually a currency crisis occurred and that led to capital flight plaguing the ASEAN economies on the 2nd July 1997 after the central banks float their currencies which depreciated heavily. (Bird 2007) empirical results prove that the source of epidemic in the FX market is not solely Thailand even though it was first to report significant devaluation. The derivative crunch led to the subsequent downfall of Lehman Brothers. SPC strike in an escalating manner that spread via multiple channels and throughout the global financial systems. Given the huge significant role that Bear Stern and Lehman Brothers in the derivative and custody financial market. This is because SPC infected the financial system at a time in which the global market is heavily integrated via affecting the derivative market and the credit market. However. this led to systemic credit crunch that escalate funding cost and counterparty risk that eventually led to financial market failure that marked the beginning of the New World Great Economic Recession. induced AFC. This implies that AFC transmit via a single channel and in a geographical manner from 2 epicentres. The SPC was triggered by the falling house prices. SP led to the derivative crunch that led to Bear Stern merged with JP Morgan at fire sale price. The wrong assumption that housing prices will always rise to give a return despite potential default losses.estate supply and defaulting loan. The faulty assumption that ASEAN economies will continuously be progressing to support short term investment. Externalities & Effect: SPC and AFC spillovers are not evenly spread across the epicentre of its respective affected region (Janssen 2008). However (Dibooglu 2006) indicated through the study of volatility of stock market during the SPC that the spread pattern of the crisis started from Thailand to Malaysia and Korea at one state and from Philippines to Taiwan and Indonesia at another state.(Dash 2007) Market panic and realization of faulty assumptions commonly trigger both crises. Country Absolute Difference on economic losses % Difference of GDP . An investment banker with good credit history saw the interest rate of his loan application jumped by 5% within 3 days. However. rapid defaulting loans and deleveraging mortgage back portfolio.

Even then. Government intention to improve welfare implemented with disaster for both crises. Conclusion: The US originated both crises and Bank was a common medium to breed SPC and AFC. Nonetheless.(US$1 billion) (US$1 billion) Time of event (discounted back to 1997) at assumed rate of 5% per annum Thailand Indonesia Philippines Malaysia South Korea ASEAN Countries US -68 -171 -28 -35 -147 -449 -5095 -40% -83% -37% -39% -34% -46% -43% Sources: (Roger C. Regulations on capital flow were relaxed but could have been guided properly prior to AFC. ASEAN countries lost about 46% of their GDP during the AFC while the US lost about 43% of its GDP during the SPC. Moreover. Moral Hazard also occurs in AFC when bank lending was based not on investment objectives. Market panic and realization of faulty assumptions commonly trigger both crises. SPC and AFC spillovers spread unevenly across its respective affected region. Moral Hazard exhibited in SPC when credit agencies were paid by their clients to rate products that will affect the credit firm’s profitability. Authorities were lax in regulating the value chain of securitization prior to SPC. Bank securitization deteriorated in SPC while Bank Intermediation supported excessive short term foreign investment in AFC. Victims of SPC who invest in CDO realized their stupidity when falling house prices exceed the defaulting rate while victims of AFC should have learn that short term investment works when the economy stay competitive. AFC transmit via a single channel and in a geographical manner from 2 epicentres. Moral Hazard can be minimised on bank lending practices but will remain in the credit rating industry.Altman 2009). ASEAN countries suffered US$449 billion losses during the AFC while the US suffered US$5095 billion losses during the SPC in terms of absolute difference. (CIA 2009) AFC generated lower absolute economic losses than the SPC but AFC generated higher % losses than SPC. perfect regulation and heavy supervision were impossible to guard dynamic and evolving financial markets because moral hazard will always be present. On the other hand. (Cheetham 1998). However. AFC did not significantly . Referring to the above diagram. authorities did not impose effective regulations to anticipate their policy implementations.

SPC furiously strike across multiple channels and throughout the global financial systems. .affect the North American economy but SPC affected everyone including Asia.