Lessons from the Asian Development Bank's Responses to Financial Crises
This information brief seeks to identify lessons gained in conjunction with ADB assistance provided during the Asian financial crisis, and to a much lesser extent from ADB responses to developing member countries experiencing fiscal and balance of payments problems, or a general banking crisis at other times.
Key Findings and Lessons
ADB's past crisis assistance has generally been effective in helping restore investor confidence in affected developing member countries through a combination of liquidity and policy support. Reform programs were implemented over a comparatively short period of time under difficult circumstances. Assistance was most useful when accompanied by crisis -related policy dialogue with due attention to government priorities and implementation capacity. Although it was often difficult at the outset to determine the full extent and nature of support needed, ADB's responsiveness and flexibility helped meet rapidly evolving client requirements. Despite the different origins and transmission mechanisms, a number of the lessons identified below in conjunction with past ADB crisis assistance would appear to be relevant for the design and implementation of crisis responses.
- Previous crisis support was mainly in the form of quick-disbursing funds to augment foreign exchange reserves and liquidity, and supplement budgetary resources. This worked well in maintaining and restoring investor confidence. More importantly, policy-based lending helped demonstrate commitment to longer-term structural adjustment. Policy dialogue on issues with a causal relationship to the crisis was more successful.
- The timing of countercyclical investment programs will be important for the effectiveness of such assistance.
- Support for maintaining access of the poor to social services (mainly health and education) and maintaining the quality of such services was generally effective, provided established or uncomplicated programs and delivery channels were used.
- Temporary market-based credit support sought to prevent viable enterprises from failing for lack of access to working capital and trade finance. However, utilization of such assistance stayed considerably below expectations due to interest and exchange rate developments and the availability of alternative funds.
- During a crisis, vital decisions often have to be made in the absence of full information, under rapidly deteriorating conditions and under substantial pressures from stakeholders. There is often a trade-off between finding the best solution, speed, and political acceptability.
- Potential for systemic problems in the financial sector needs to be identified early and addressed credibly and decisively to restore confidence. The fiscal impact of liquidity support and Government guarantees needs to be carefully considered.
- Liquidity support and Government assistance for failing financial institutions need to be guided by a comprehensive, transparent, credible, and well communicated strategy that clearly spells out the basic principles.
- The restructuring of financial institutions needs to consider long-term sector efficiency and innovation, and linkages with the real sector reforms/restructuring and the overall macroeconomic environment.
- Donor coordination may not be easy, but is vital for crisis support.
- Executive Summary
- Relevant Lessons Related to Specific Issues
- General Lessons for Crisis Support
- Appendix: Relevant Evaluation Studies