Banking crisis in Malaysia

Abstract

It is argued in this paper that the currency crisis was due to the rapid expansion in the money supply in relation to reserves and this triggered the outflow of funds and the free fall of the ringgit The outflow of funds and the free fall of the ringgit caused the stock market crash and reduced corporate earnings and a fall in property prices which in turn caused the banking crisis and led to proposals to recapitalize the banks. The paper uses the monetary approach to exchange rates as it provides the theoretical framework for discussing the relationship between domestic credit creation, reserves and exchange rates within the context of a fixed and floating exchange rate regime.