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Financial crises have been a worldwide phenomenon in the last decade. This study tries to investigate how the 1997Asian financial crisis affects the non-performing loans of Taiwan. We adopt a panel data set with 40 Taiwanese commercial banks (established before 1996) for the period of 1996-1999 for empirical analysis. We find that both banks' loans and sizes are positively related to the rate of non-performing loans, but at a diminishing rate; rates of non-performing loans steadily increased from 1996 to 1999, possibly resulting from the 1997 Asian financial crisis; banks established after deregulation, on average, have a lower rate of non-performing loans than those established before deregulation.
I. Introduction
Has Taiwan come to a local financial crisis? The Economist pointed out, Nov. 11, 2000, that bad loans in Taiwanese domestic banks reached new highs, and that a local financial crisis is immediate. The New York Times, Dec. 5, 2000, and Business Week, Dec. 11, 2000, followed suit by citing Salmon Smith Barney that the non-performing loans (NPL) ratio among listed banks in Taiwan had amounted to over 6 percent, and because of the narrow definition in official non-performing loan statistics, the NPL ratio could in reality be as high as between 10 to 15 percent. Standard & Poors also revised its outlook on Taiwan from stable to negative on December 6, 2000.
Loans are one of the major outputs provided by a bank, but the loan is a risk output. There is always an ex ante risk for a loan to eventually become non-performing. Nonperforming loans can be treated as undesirable outputs or costs to the bank that does the loaning, which decrease the bank's performance (Chang, 1999). The risk from NPL arises as the external economic environment becomes worse off such as economic depressions (Sinkey and Greenawalt, 1991). Since the 1997 Asian financial crisis, NPL have swiftly accumulated in many Asian economies (Chang, 1998; Lauridsen, 1998; Robinson and Posser, 1998; Wade, 1998). Controlling NPL is thus very important for both an individual bank's performance (McNulty et al., 2001) and an economy's financial environment.
Financial crises have been an increasing international phenomenon in the last decade, possibly a result...