Dealing With Systemic Crisis

Third Annual International Seminar

on Critical Issues in Financial Stability

Washington, D.C., U.S.A.

6 June 03

by

Tarisa Watanagase

Deputy Governor, Bank of Thailand

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A. Causes

B. Evolution and Impact of the Dual Systemic Crisis

C. Crisis Management

D. Lessons Learnt

E. Current Conditions

F. On-going Efforts

Presentation Outline

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A. Causes

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i. Loss of competitiveness, fixed exchange rate

regime, and FX intervention policy

ii. Financial institution governance and

supervision

iii. Contagion Effect

a. Main causes of the crisis

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i. Policy-making process and administration:

Lack of timely decision making

ii. Structure of economy and financial system

b. Factors which magnified problems

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B. Evolution and Impact of the Dual Systemic Crisis

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• Export slowed, investors confidence declined, stock market declined, asset price declined

• Capital outflows, decline in international reserves• Bank of Thailand required problem financial institutions to

submit resolution plan and capital increase• Names of problem institutions spread, cost of borrowing

increased, liquidity crisis, liquidity injection, insolvency• Liquidity injection increased supply of Baht and exacerbated

pressure on currency• Suspension of 16 finance companies in June 1997

i. Prior to float of Baht

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• Exchange rate volatility • Liquidity problem increased• Comprehensive Policy Package (IMF Package):

Tightened macro policy and strengthened financial institutions to signal policy credibility

• Increased vulnerability: Foreign currency debt/GDP rose significantly due to depreciation and GDP contraction.

ii. After float of Baht in July 1997

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• Credit risk and default of borrowers with FX exposure increased.

• Increased loan defaults, high NPL, strategic NPL• Increase in provisioning, lower profit/ increased

loss, which result in inadequate capital.• The massive depreciation compounded the

problem as increase in interest rate led to liquidity and eventual insolvency problems at more financial institutions

• Additional 42 finance companies were suspended

ii. After float of Baht in July 1997(continued)

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C. Crisis Management

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i. Immediate measures to resolve the crisis Closure of 56 finance companies Issuance of blanket guarantee in order to restore

depositors’ confidence Financial institutions recapitalisation

(both by private means and governments’ support schemes)

Financial institutions intervention, merger, and privatization

a. Government Role

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Financial institutions intervention, merger, and privatization (continued)

Lessons learnt : keeping intervened banks open would provide continuation of services to customers and hence preventing deterioration of assets.

a. Government Role (continued)

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Financial institutions intervention, merger, and privatization (continued)

Objectives of resolution strategies:1. Be cost-efficient2. Facilitate consolidation of the banking sector3. Ensure credibility and transparency4. Enhance confidence in the banking system5. Ensure consistency with the capital support

facilities

a. Government Role (continued)

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Financial institutions intervention, merger, and privatization (continued)

Measures: • Write down capital to ensure that the losses were

borne by the shareholders

• FIDF inject new capital into the financial institutions and appoint a new management team.

• Invitation for Thai and foreign strategic investors to invest in the banks.

a. Government Role (continued)

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ii. Measures to strengthen financialinstitutions system and increase confidence

Prudential Measures improve asset qualities of financial institutions Improve supervisory capacity (risk-based supervision) Good governance and disclosure Legal framework review

a. Government Role (continued)

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ii. Measures to strengthen financialinstitutions system and increase confidence (continued)

NPL Resolutions Establishment of organizations to

facilitate the financial sector reform and debt restructuring

a. Government Role (continued)

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i. Business reform • increase non-interest income• cost reductions

ii. Enhance competitiveness• expansion of operating hours• open sub-branches in locations with high potential• adopting new business model• introduce new delivery channels

b. Industry Role

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iii. Management reform• Good governance• Reorganization• Staff development• Improve internal audit standard• Implement effective tools and system for

risk management

b. Industry Role (continued)

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• Total cost 1.4 trillion Baht = About 25% of GDP (Gross basis, recovery not yet deducted)

• All costs fiscalised by law• 800 billion Baht worth of government

bonds issued. • The remaining 600 billion Baht to be

issued when obligations fall due.

c. Cost of the Financial Crisis

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a. Early warning system, prompt corrective actions, crisis management system are critical.

b. Magnitude of the crisis was too big and too complex for traditional tools.

D. Lessons Learnt

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D. Lessons Learnt

c. Shutting down large number of FIs without separation of viable borrowers and safety-net for them could lead to wider corporate failure which adds another dimension to the systemic risk, prolonging economic contraction.

d. Corporate governance is necessary. e. Prudential regulations/supervision need

regular benchmarking and improvement.

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E. Current Conditions

i. Macroeconomic performance • GDP growth at a more solid pace, 6.3% @Q1-03 • Internal Stability: in 2002 inflation averaged at 0.7

percent with core inflation at 0.4 percent• External Stability continued to improve.

• The balance of payments has been in surplus • International reserves reached 38.9 billion USD

at the end of 2002. • External debt at 59 billion, half of peak

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ii. Financial institutions stability

• Profitability of financial institutions has improved remarkably in 2002.

• NPL has been decreased due to transfer of distressed assets to TAMC, debt restructuring, financial reform, and write-off.

E. Current Conditions (continued)

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E. Current Conditions (continued)

ii. Financial institutions stability (continued)

• Loan loss provisioning of the majority of financial institutions are higher than official requirement.

• Capital was increased significantly; currently every institution maintains higher BIS Ratio than the minimum requirement.

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• Improvement of early warning system, institutional arrangement and procedures for problem resolution,risk management system and contingency plan at the Bank of Thailand.

• Market-oriented risk-based prudential regulations.

• Increased transparency and good governance of policy-making process

F. On-going Efforts

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F. On-going Efforts (continued)

• Redress structural weaknesses in the financial system– Financial Sector Master Plan– Preparation for BIS New Accord.– SEC is drafting master plan for capital market

developments which should expand both bond and equity markets.

– Legal reforms: DIA, New Financial Institution Business Act, Financial Derivatives Act, Amendment of Bankruptcy and Foreclosure Law

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