Relationship Banking and Thailand's Crisis: The Difficult Transformation from Personal Relations to Market Relations

Abstract

The Asian crisis is generally regarded as a crisis of Asia's financial institutions. In the case of Thailand, however, there is evidence of efficient banking in the past. It is argued, therefore, that these institutions had retained their strengths, but that their working environment had changed due to massive liberalization. This move undermined the importance of personal relations in banking and thus the basis of Thailand's traditional form of capital allocation. Moreover, the new institutions needed to permit market-based relationship banking were not in place, making the financial system inefficient and fragile. This provides a partial explanation as to why the economy faltered in the recent crisis.