A new financial crisis in making and a key reason for financial instability in Asia’s emergent economies is ballooning corporate debt-trap due to industry life cycles, demanding an overhaul of sectoral fundamentals. Characterized by non-performance of companies, evinced as defaults, such cyclic and unpredictable declines engulf banks and subsequently, the entire economy. Alleviating such shocks demands capital and industry specific expertise, difficult to be availed timely and locally in EMEs. Despite recourses available to banks, some observations are counter-intuitive. What could hold monetary transmission to take effect in such conditions? What could explain policy stance of not pro-actively encouraging the apt foreign capital investments in favorable instances despite its evident advantages and allayed risks? What could still keep running the Debt Restructuring procedures in EMEs despite their proven insufficiency? Why is the onus of debt resolution with ‘banks’, rather than the ‘defaulting enterprises’? I assess this situation by building a model based on Economics of Dealer Function as an alternative to traditional view. To dissect banks’ market-making ability, I look at banks as carriers of inventories of cash and loans. I conceptually derive a parameter, 'Outside Investor Lag’, and its pronounced impact on liquidity of bank-debt markets. The framework gives policy-makers a tool, much before the crisis reaches an alarming level, to know how sustainable debt is. This parameter is traditionally not considered giving rise to the said discrepancies. Identifying the right outside investor and gauging repercussions of 'Outside Investor Lag’ opens doors for policy willingness to encourage free capital flows, making policy stance ‘pro-active’ and ‘cycle-agnostic".
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A new financial crisis in making and a key reason for financial instability in Asia’s emergent economies is ballooning corporate debt-trap due to industry life cycles, demanding an overhaul of sectoral fundamentals. Characterized by non-performance of companies, evinced as defaults, such cyclic and unpredictable declines engulf banks and subsequently, the entire economy. Alleviating such shocks demands capital and industry specific expertise, difficult to be availed timely and locally in EMEs. Despite recourses available to banks, some observations are counter-intuitive. What could hold monetary transmission to take effect in such conditions? What could explain policy stance of not pro-actively encouraging the apt foreign capital investments in favorable instances despite its evident advantages and allayed risks? What could still keep running the Debt Restructuring procedures in EMEs despite their proven insufficiency? Why is the onus of debt resolution with ‘banks’, rather than the ‘defaulting enterprises’? I assess this situation by building a model based on Economics of Dealer Function as an alternative to traditional view. To dissect banks’ market-making ability, I look at banks as carriers of inventories of cash and loans. I conceptually derive a parameter, 'Outside Investor Lag’, and its pronounced impact on liquidity of bank-debt markets. The framework gives policy-makers a tool, much before the crisis reaches an alarming level, to know how sustainable debt is. This parameter is traditionally not considered giving rise to the said discrepancies. Identifying the right outside investor and gauging repercussions of 'Outside Investor Lag’ opens doors for policy willingness to encourage free capital flows, making policy stance ‘pro-active’ and ‘cycle-agnostic".
