Events during the Asian crisis left a mark on the balance sheets of the central banks
of Indonesia, Korea, Malaysia and Thailand. An extreme parallel is offered by the
Philippines, where the debt crisis of the 1980s left the central bank insolvent
(Cuisia 1992; Zialcita 1993). The 1993 New Central Bank Act attempts to prevent
a recurrence.
The balance-sheet aftermath of crisis can, at the limit, impair the capital and
weaken the income of the central bank, and thereby hurt its credibility in the market
place and make it dependent on appropriations. The principle is important even when
none of these results follow. For instance, in the case of the run on, and subsequent
effective takeover of, Continental Illinois by the Federal Deposit Insurance
Corporation in 1984, the Federal Reserve’s discount window advance to the bank
remained outstanding for years. In the view of some observers, in allowing the
discount window advance to remain outstanding for so long, the Federal Reserve
was inappropriately lending to the solvency-support agency, the FDIC. Even if the
Fed’s monetary operations were in no way impaired by this arrangement, the
principle of no Federal Reserve funding of the government was arguably frayed.
It is by no means surprising that, in system-wide financial crises, central bank
balance sheets in Indonesia, Korea, Malaysia and in effect Thailand took some hits.
The hope must be that these hits prove temporary, and generally there are grounds
for hope. Last year the Indonesian government took responsibility for losses related
to Bank Indonesia loans to insolvent banks during the crisis. In Korea, the central
bank has received substantial repayments over the past two years on various
crisis-related credits. In Malaysia, a bank recapitalisation fund owned by the central
bank has recovered the bulk of the funds advanced to banks.