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Dealing With Systemic Crisis. by Tarisa Watanagase Deputy Governor, Bank of Thailand. Third Annual International Seminar on Critical Issues in Financial Stability Washington, D.C., U.S.A. 6 June 03. Presentation Outline. Causes Evolution and Impact of the Dual Systemic Crisis - PowerPoint PPT Presentation

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  • Dealing With Systemic CrisisThird Annual International Seminar on Critical Issues in Financial StabilityWashington, D.C., U.S.A.6 June 03by Tarisa WatanagaseDeputy Governor, Bank of Thailand

  • Presentation OutlineCauses Evolution and Impact of the Dual Systemic CrisisCrisis Management Lessons LearntCurrent Conditions On-going Efforts

  • A. Causes

  • a. Main causes of the crisis

    Loss of competitiveness, fixed exchange rate regime, and FX intervention policyFinancial institution governance and supervision Contagion Effect

  • b. Factors which magnified problems Policy-making process and administration: Lack of timely decision making Structure of economy and financial system

  • Evolution and Impact of the Dual Systemic Crisis

  • i. Prior to float of BahtExport slowed, investors confidence declined, stock market declined, asset price declined Capital outflows, decline in international reservesBank of Thailand required problem financial institutions to submit resolution plan and capital increaseNames of problem institutions spread, cost of borrowing increased, liquidity crisis, liquidity injection, insolvencyLiquidity injection increased supply of Baht and exacerbated pressure on currencySuspension of 16 finance companies in June 1997

  • ii.After float of Baht in July 1997Exchange rate volatility Liquidity problem increasedComprehensive Policy Package (IMF Package): Tightened macro policy and strengthened financial institutions to signal policy credibilityIncreased vulnerability: Foreign currency debt/GDP rose significantly due to depreciation and GDP contraction.

  • ii. After float of Baht in July 1997(continued)Credit risk and default of borrowers with FX exposure increased.Increased loan defaults, high NPL, strategic NPLIncrease 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 institutionsAdditional 42 finance companies were suspended

  • C. Crisis Management

  • a. Government Rolei. Immediate measures to resolve the crisisClosure of 56 finance companiesIssuance of blanket guarantee in order to restore depositors confidenceFinancial institutions recapitalisation(both by private means and governments support schemes)Financial institutions intervention, merger, and privatization

  • Government Role (continued)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.

  • Government Role (continued)Financial institutions intervention, merger, and privatization (continued)Objectives of resolution strategies:Be cost-efficientFacilitate consolidation of the banking sectorEnsure credibility and transparencyEnhance confidence in the banking systemEnsure consistency with the capital support facilities

  • Government Role (continued)Financial institutions intervention, merger, and privatization (continued)Measures: Write down capital to ensure that the losses were borne by the shareholdersFIDF 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.

  • Government Role (continued)Measures to strengthen financialinstitutions system and increase confidence

    Prudential Measures improve asset qualities of financial institutionsImprove supervisory capacity (risk-based supervision) Good governance and disclosureLegal framework review

  • Government Role (continued)Measures to strengthen financialinstitutions system and increase confidence (continued)NPL ResolutionsEstablishment of organizations to facilitate the financial sector reform and debt restructuring

  • b. Industry RoleBusiness reform increase non-interest incomecost reductionsEnhance competitivenessexpansion of operating hoursopen sub-branches in locations with high potentialadopting new business modelintroduce new delivery channels

  • b. Industry Role (continued)Management reformGood governanceReorganizationStaff developmentImprove internal audit standardImplement effective tools and system for risk management

  • c. Cost of the Financial CrisisTotal cost 1.4 trillion Baht = About 25% of GDP (Gross basis, recovery not yet deducted) All costs fiscalised by law800 billion Baht worth of government bonds issued. The remaining 600 billion Baht to be issued when obligations fall due.

  • D.Lessons LearntEarly 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 Learntc. 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.

  • E.Current ConditionsMacroeconomic 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 percentExternal 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

  • E.Current Conditions (continued)ii.Financial institutions stabilityProfitability 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)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.

  • F.On-going EffortsImprovement 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 (continued)Redress structural weaknesses in the financial systemFinancial Sector Master PlanPreparation 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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