How healthy is the Asian financial system?

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COVID-19 is a global health crisis that has rapidly turned into an economic one in virtually every country in the world. As many governments resort to unprecedented levels of fiscal stimulus to arrest the impact on their economies, the question foremost on the minds of many policy makers and corporations is whether this economic crisis will develop into a financial crisis, particularly in the developing world. Initial signs of the shock’s ripple effects on Asia’s financial system are emerging.

In our article “Signs of stress: Is Asia heading toward a debt crisis?,” published in August 2019, we stressed that the fundamental health of Asia’s real1 and financial sectors was deteriorating. Any shock to earnings will probably exacerbate these effects. In 2020 (as of May 20), the financial-services sector in Asia has lost over $920 billion in market value, largely because of investor concerns about the increasingly high levels of nonperforming assets in bank portfolios as a result of COVID-19. Reports are beginning to emerge of runs on provincial banks in mainland China. Ratings agencies, including Fitch, have revised their outlook on Asia–Pacific banks to negative.

Could any signposts indicate whether a financial crisis is likely, how quickly it might happen, and, if it did, whether it would probably be isolated to a few markets or spread across the region? To answer these questions, we studied financial crises over the past 40 years, derived patterns of the interplay across the different elements of the economy, and identified a series of interconnected imbalances that an external shock like COVID-19 could trigger.

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