Bank restructuring and financial institution reform in Indonesia

The banking sector underwent drastic reform in post-crisis Indonesia. Bank restructuring, driven by IMF conditionalities, resulted in the exit of insolvent banks and ownership changes of major private banks. Through recapitalization and sales of government-held shares, foreign-owned banks emerged as leading actors in the place of business-group-affiliated banks. As part of the restructuring process, an exit rule was created. The central bank, which up to that time had been given only partial authority under the jurisdiction of the Minister of Finance, now gained a full range of authority over banks. The central bank's supervision system on banks, risk management systems at individual banks, and their efforts to build risk management capacities, began to function. This is totally different from the old financial institution under the Soeharto regime, where banks had no incentive to control risks, as the regime tacitly ensured their survival.

Democratization and Financial Reform in Taiwan: The Political Economy of Bad-Loan Creation

This study shows that many bad loans now burdening Taiwan's financial institutions are interrelated with the society's democratization which started in the late 1980s. Democratization made the local factions and business groups more independent from the Kuomintang government. They acquired more political influence than under the authoritarian regime. These changes induced them to manage their owned financial institutions more arbitrarily and to intervene more frequently in the state-affiliated financial institutions. Moreover they interfered in financial reform and compelled the government to allow many more new banks than it had originally planned. As a result the financial system became more competitive and the qualities of loans deteriorated. Some local factions and business groups exacerbated the situation by establishing banks in order to funnel funds to themselves, sometimes illegally. Thus many bad loans were created as the side effect of democratization.