Bond Market Development in Emerging Asian Economies: Bank-based Versus Market-based Financial Systems

The crash of stock markets and the credit crunching by the banking sector during the 1997 Asian Financial Crisis have been the catalyst for bond market development in many crisis-affected developing Asian countries. Asian governments started to issue more bonds to finance economic recovery and restructuring of banks and firms. Corporate sector relied on corporate bond issuance as the only safety valve to overcome business losses, liquidity problems and financing of strategic investment projects, when access to banks¿ credit line and equity market were limited. Moreover, the crisis has highlighted the problems of maturity and currency mismatches. Sovereign and corporate borrowers that depended on external debt financing before the crisis have found themselves in trouble because exchange rate depreciation has increased their debt burdens. Issuance of bonds denominated in domestic currency will thus help to overcome this exchange rate risk. Banks started to issue long-term bonds (liability in their balance sheet) to match with their long-term asset (bank loans granted) and thus overcome the maturity mismatch between short-term deposits and long-term bank loans.