Going forward, the world is likely to continue to be plagued by financial crisis. History has shown that there has been more than 100 distinct banking crises in the past two decades. While the trigger factors for such financial crises may be different, for most, there was a general loss of confidence, disruptions in the financial intermediation process and a general downward spiral of asset prices. While it is argued that what is needed is the reform of the international financial architecture, for any individual country, the prospect of surviving such a crisis is not only about building resilience, but also having the capacity to effectively manage the crisis.
Such a crisis was experienced in the Asian region 10 years ago. Several parallels can be drawn between the Asian financial crisis and the current financial crisis. In both cases, the crisis followed a period of strong growth, rapid credit expansion and rising asset prices. Prior to the Asian crisis, there was indiscriminate lending by the banking sector. Similarly, the current financial crisis originated from imprudent lending practices and excessive risk taking that resulted in the formation of asset bubbles. In Asia, domestic credit rose to unsustainable levels, reaching 180% of gross domestic product (GDP). In the US, the ratio was 240% in 2007.
