A model of the domestic financial intermediation of foreign capital inflows based on agency costs is developed for studying financial crises in emerging markets. In equilibrium, the banking system becomes progressively more fragile under imperfect prudential regulation and public sector loan guarantees until a crisis occurs with a sudden reversal of capital flows. The crisis evolves endogenously as the banking system becomes increasingly vulnerable through the renegotiation of loans after idiosyncratic firm-specific revenue shocks. The model generates dynamic relationships between foreign capital inflows, domestic investment, corporate debt and equity values in an endogenous growth model The model's assumptions and implications for the behavior of the economy before and after crisis are compared to the experience of five East Asian economies. The case studies compare three that suffered a crisis or near-crisis, Thailand and Malaysia, to two that did not, Taiwan Province of China and Singapore, and lend support to the model.

This paper uses a unique micro-level data-set on Chinese firms to test for the existence of a "political-pecking order" in the allocation of credit. Our findings are threefold. Firstly, private Chinese firms are credit constrained while State-owned firms and foreign-owned firms in China are not; Secondly, the geographical and sectoral presence of foreign capital alleviates credit constraints faced by private Chinese firms. Thirdly, geographical and sectoral presence of state firms aggravates financial constraints for private Chinese firms (“crowding out”). Therefore it seems that ongoing restructuring of the state-owned sector and further liberalization of foreign capital inflows in China can help to circumvent financial constraints and can boost the investment of private firms.

Opacity (the converse of transparency) has only recently received attention as it has been considered to be linked to a series of financial crises. This study utilizes Price Waterhouse Cooper’s 2001 opacity indices and capital flow data from the World Bank and Bank for International Settlement. Capital flows are disaggregated into categories of foreign direct investment flows by multinational enterprises, portfolio capital flows and international bank lending. Regression analysis supports the idea that higher opacity leads to a reduction in capital flows, in general. The results have policy-relevant implications as countries wishing to enhance capital inflows need to reduce the level of opacity in decision-making. More interestingly, however, the investigation with opacity sub- indices shows higher capital flows, in general, were associated with higher opacity in corruption and regulatory indices corroborating some existing evidence in the FDI literature that opacity will influence the choice of entry mode rather than the actual level of flows. In addition, the paper supports the notion that Bank Assurance mechanisms are highly desirable with regard to international bank lending, as the nature of these flows means that they are more influenced by general levels of opacity and are less responsive than FDI and portfolio flows.

Based on the research of foreign capital flows and financial risks, this note puts forward the conceptual model─“Foreign Capital Reliance”(FCR), and analyses its interior development mechanism and the possibility & inevitability of its result in Financial Crisis from the perspective of monetary capital. The author believes that financial risks also exist in foreign capital flows, and foreign capital inflows are entirely possible to result in a more fragile economic system. The author also regards Asian Financial Crisis as Crisis typical of FCR. The empirical analyses of sampling five Asian countries: Thailand, Korea, Indonesia, Malaysia and Philippines support the arguments.