A third part of the reform agenda is to use market discipline more effectively as a regulatory and supervisory tool. Too-big-to-fail perceptions weaken normal market disciplinary forces by producing a distorted set of incentives in which counterparties of a large institution may not price into their extensions of credit the full risks assumed by the institution.
How could we bomb out so badly, when both countries had a very similar exposure to the Asian crisis? This isn’t the place to provide a comprehensive answer to this question, and indeed I don’t think anybody yet has a comprehensive answer to this question. Some blame poor monetary policy decisions by the Reserve Bank for the difference.