"Identifying the Demand and Supply Effects of Financial Crises on Bank Credit-Evidence from Taiwan", Southern Economic Journal, (SSCI)

In the aftermath of the Asian financial crisis, Taiwan’s bank credits slowed down dramatically while the economy experienced one of the worst recessions in recent history. Whether the slowdown was mainly caused by the demand or the supply effect is unclear. An innovative approach is adopted in the empirical investigation, which uses the short-side rule of bank loans’ market transactions to help infer the relative shifts of the demand and supply, as well as to identify factors contributing to the changes in demand and supply. We find that a large decline in supply is mainly responsible for the slowdown, and we identify the deposit drain and the increase in overdue loans as the main contributing factors. We also find that shrinkages in alternative financing sources may have indirectly contributed to the excess demand in the bank loan market. Therefore, the deterioration of the bank balance sheet was the main cause for the slowdown of bank credit expansion, and policies should be aimed to strengthen the financial condition of financial institutions.