Thailand Capital Support Facilities 1998

The Thai government’s attempts to restructure the financial sector fell into two categories: (1) efforts to solve problems of insolvency and capital inadequacy, and (2) measures to alleviate distressed assets and non-performing loans (NPLs) (Santiprabhob 2003).

Within the first category, the government suspended and closed nonviable finance companies, intervened in insolvent financial institutions, recapitalized private financial institutions, and recapitalized and restructured state-owned financial institutions (Santiprabhob 2003). Within the second category, the government liquidated assets of closed finance companies, reformed legislation on NPL resolution, and led both state and market-driven efforts on NPL resolution (Santiprabhob 2003). (Please refer to Dreyer [2021] for more information about the Thai government’s handling of distressed assets and NPLs.)

On August 14, 1998, the government launched the “August 14 Package” (the Package), which was a program meant to recapitalize private financial institutions (Santiprabhob 2003). Through the Package, the government offered two voluntary capital support facilities that required private institutions to write off bad debts in compliance with new regulatory requirements that would kick in at the end of 2000 (Santiprabhob 2003). The tier-1 support facility aimed to help institutions attract private capital to better handle losses, and the tier-2 support facility was intended to provide financial resources, quicken corporate debt restructuring, and foster new lending (Santiprabhob 2003; Nimmanahaeminda and Sonakul 1998a). Other legal efforts to recapitalize private financial institutions included the liberalization of constraints on foreign ownership in November 1997, and Bank of Thailand’s (BOT) acceptance of hybrid securities as part of regulatory capital in 1999 (Santiprabhob 2003).

During the early stages of the crisis response, the Thai government focused on capital adequacy and separating potentially solvent from insolvent financial institutions (Santiprabhob 2003). Santiprabhob (2003) argued that this disproportionate attention^FSantiprabhob (2003) partly attributed this to the government’s limited resources and finite abilities to respond to multiple issues simultaneously (Santiprabhob 2003). The author also acknowledged Thai authorities’ lack of a crisis management plan before the crisis, and the limited political will to employ several drastic measures at once (Santiprabhob 2003). In a 2017 interview, former Minister of Finance Tarrin Nimmanahaeminda compared crisis-policy prioritization to flying a plane with most of the engines shut down (Kotani 2017). meant that authorities paid too little attention to asset deterioration and NPL restructuring (Santiprabhob 2003). Other academics reported issues with the government’s regulatory treatment of assets and NPLs, which were closely related to the tier-1 and tier-2 programs. In a 2001 World Bank report, Patrick Honohan remarked that Thailand was slow to recapitalize and to dispose of non-performing assets (Honohan 2001). Private banks largely met phased-in loan-classification and provisioning by the end of 1999 (ADB 1999). However, banks still faced capital shortfalls because: (1) the book value of loans was overstated^FDuring the first accounting period of 1999, the Thai government relaxed the criteria used to deduct collateral value from debtors’ accounts to “[make] collateral appraisal more suitable for the current conditions” (BOT 1999a). as banks overestimated the value of debtors’ collateral; (2) provisioning guidelines were backward-looking and not forward-looking, which probably would have further decreased the quality of loans; and (3) CAR requirements underestimated the impact of both new and aging^FStarting on January 1, 1999, restructured loans could be reclassified as “substandard” or “pass” on the day of restructuring if the institution met certain criteria (BOT 2000a). The rules were [sic] “designed to reduce the potential financial burden on financial institutions during the period of high loans” (BOT 2000a). While the ADB authors identified these changes as regulatory bugs, the Thai regulators intentionally designed them as features. non-performing loans (NPLs) (ADB 1999).

During the crisis, the government passed several emergency decrees to lift general restrictions on government borrowing (Suthiwart-Narueput and Pradittatsanee 1999). On August 21, 1998, the cabinet of Thailand passed the Emergency Decree Allowing the Ministry of Finance to Borrow Money for the Strengthening of the Financial System (“Emergency Decree”), which (effective August 24) allowed the Ministry of Finance to borrow up to B300 billion to fund its tier-1 and tier-2 capital support facilities (BOT 1998a). This funding window lasted through December 31, 2000 (Suthiwart-Narueput and Pradittatsanee 1999). Of the committed amount, the government utilized about 73.7 billion baht (24.6%) (BOT 2000a).

As part of its crisis response, the Thai government established multiple aid packages with both the IMF and World Bank; one of the recurring shared goals of these packages was to recapitalize the Thai financial system (World Bank 2006; Nimmanahaeminda and Sonakul 1998b). Then-Minister of Finance Tarrin Nimmanahaeminda, working with IMF and World Bank officials, designed the capital support facilities (Business Day 1999). In its fifth Letter of Intent (LOI) with the IMF, the Thai government introduced the capital support facilities and expressed confidence that the program provided incentives for financial institutions to join, while safeguarding against moral hazard (Nimmanahaeminda and Sonakul 1998a). On December 1, 1998, the seventh LOI explained that all finance companies and banks needing capital within the next six months were required to sign memoranda of understanding (MOU)—which included plans to recapitalize—by January 31, 1999 (Nimmanahaeminda and Sonakul 1998b). The signing of MOUs on recapitalization was an IMF performance criteria, and all financial institutions had to sign them—regardless of their participation in the capital support facilities (Nimmanahaeminda and Sonakul 1998c). To the surprise of some analysts, banks that held sufficient levels of capital were not required to sign capital rehabilitation plans with the BOT (Business Day 1999). Financial institutions could make use of the tier-1 and tier-2 capital support facilities to satisfy these MOUs (Nimmanahaeminda and Sonakul 1998b). Banks and other financial institutions regularly signed MOUs at six-month intervals to address their capital needs through end-2000 (Nimmanahaeminda and Sonakul 1998c; 1999a; 1999b). The BOT had the right to intervene in any financial institution that failed to meet its MOU commitments (Lindgren et al. 1999).

The BOT ordered suspensions, demanded capital raises, and set the regulations on capital and loan-loss provisioning (Santiprabhob 2003). The BOT was also the official registrar for public-debt securities, including government bonds, which covered the cost of capital support facilities (Ganjarerndee 2009; Rattakul 2003). The BOT regularly conducted audits of restructuring agreements, which were related to tier-2 capital injections (Nimmanahaeminda and Sonakul 1998a).

The Ministry of Finance (MOF) purchased participating institutions’ preferred shares or subordinated debt, and paid the participating banks with government bonds that financial institutions were required to purchase under the support facilities’ terms of participation (Nimmanahaeminda and Sonakul 1998a; TISCO 1998; TISCO 1999). Consequently, MOF also owned the private capital, became the public stakeholder in the participating companies, and was entitled to jointly appoint or change the recipient’s top management (TMB 1999b). MOF had significant influence in designing the capital support facilities, setting its original terms, and suggesting amendments to the active program, which were then carried out by the BOT (BOT 1999b).

On September 29, 1998, the cabinet of Thailand approved and set up the Financial Restructuring Advising Committee (FRAC) (Koeberle and Sondergaard 1998a). FRAC was chaired by a former deputy minister of finance, and staffed by officials from the BOT, MOF, and the private sector; and the BOT operated its secretariat (BIS 1999). As an advisor to both the BOT and MOF, FRAC generally oversaw the implementation of restructuring efforts (Lindgren et al. 1999; Nimmanahaeminda and Sonakul 1998a). FRAC received and reviewed tier-1 and tier-2 capital support applications (Srisukkasem 1999; Reuters Staff 1998a). FRAC also controlled the budget dedicated to financial institutions’ recapitalization, determined the purchase prices of preferred shares issued under the tier-1 and tier-2 facilities, and monitored the support facilities while the program was under way (BOT 1999a). FRAC also issued detailed guidelines for participating, and controlled the budget dedicated to financial institutions’ recapitalization (BOT 1999a). FRAC also arbitrated on any disputes regarding the amount of losses related to write-downs (Lindgren et al. 1999).

The Emergency Decree authorized MOF to issue bonds to fund its capital support facilities; MOF effectively exchanged the bonds for preferred shares (tier-1) or subordinated debt (tier-2) (Suthiwart-Narueput and Pradittatsanee 1999; BOT 2000a). Before issuing government securities, MOF first had to obtain the cabinet’s approval for the bonds’ interest rates, terms, conditions, fees, expenses, and procedures regarding management, repayment, or changes to the government’s payment schedule (Emergency Decree 1998). After securing approval, MOF could allocate the proceeds from emergency issuances as it deemed fit—without needing to “deliver income” back to the government under the law on budgetary methods and the law on treasury (Emergency Decree 1998). MOF had to publish details about all emergency issuances in the Royal Thai Government Gazette within one month from the start date of the loan contract (Emergency Decree 1998). MOF first purchased the securities from the tier-1 and tier-2 capital support participants and then sold government bonds to the same institutions in an amount equal to the purchase sum (TISCO 1998; TISCO 1999). MOF’s Public Debt Management Office (PDMO) managed the government debt issued to pay for the capital support facilities (Ganjarerndee 2009; Rattakul 2003). The statutory capital support bonds were classified as central government domestic debt (Suthiwart-Narueput and Pradittatsanee 1999).

The government officially announced the August 14 Package through a joint press release with the BOT and MOF (Nimmanahaeminda and Sonakul 1998a). The initial press release offered basic package details, such as the types of capital and participation limits, but omitted application details, such as guidelines for loan classification (Chaitrong 1998). Further details about capital support eligibility came in a press release on August 19, 1998 (BOT 1998b). The later press release clarified that the purpose of the capital support facility was to re-ignite financial institution lending to businesses (BOT 1998b). According to an August 25, 1998, Letter of Intent with the International Monetary Fund, FRAC was scheduled to release a detailed guideline for capital support participation by September 30, 1998 (Nimmanahaeminda and Sonakul 1998c). On September 29, MOF announced the eligibility conditions and pre-application requirements for participation in the tier-1 and tier-2 capital support facilities (BOT 1998a).

Some banks endured months of press speculation about whether they would enroll in the capital support facilities (Kanoksilp and Keawkumnurdpong 1999). Through the Stock Exchange of Thailand (SET), financial institutions released statements confirming or denying their intent to participate (Reuters Staff 1998c; 1999). Some future participants included the level of capital while others omitted the total amount of support (Reuters Staff 1998c). There were real-time, negative market reactions to rumors of financial institutions joining the program (Reuters Staff 1999; The Nation Staff 1999d). At times, Minister of Finance Tarrin Nimmanahaeminda announced the names of some banks that “would” apply to both tier-1 and tier-2 capital support facilities before they had formally filed applications with the BOT (Agency France-Presse 1999; Finance Reporters 1999). In other public statements, he acknowledged financial institutions’ interest in the facilities, but did not identify the potential participants by name (Finance Reporters 1999).

The size of tier-1 injections depended on the financial institution’s ability to meet regulatory minima set by the Bank of Thailand. After the institution met the full loan classification and provisioning standards (LCP) for end-2000 (including up-front write-offs), the government injected tier-1 capital to satisfy the 2.5% capital adequacy ratio (Nimmanahaeminda and Sonakul 1998a; Santiprabhob 2003; Lindgren et al. 1999). Above 2.5% CAR, the government only injected tier-1 capital if it was matched by private capital injections^FRelying on the due diligence of private investors to determine the level of tier-1 capital contributions, the Thai government matched capital injections from both new and existing shareholders (Lindgren et al. 1999). of equal or greater value (Nimmanahaeminda and Sonakul 1998a; Santiprabhob 2003). The government did not specify limits on the amount of tier-1 support for individual participants (Nimmanahaeminda and Sonakul 1998a).

The size of tier-2 injections was contingent on new loan extension and costs related to debt restructuring. The total amount of available tier-2 capital was equal to write-offs, the total amount of provisioning, and 20% of the net increase in outstanding private sector loans (Nimmanahaeminda and Sonakul 1998a). Though each participant was eligible to receive support equal to 2% of risk-weighted assets, tier-2 support for increased lending was capped at 1% of risk-weighted assets (Nimmanahaeminda and Sonakul 1998a). A single debt-restructuring agreement was not eligible for more than 10% of the tier-2 support available to the institution (Nimmanahaeminda and Sonakul 1998a).

Institutions could apply to the FRAC for tier-2 support at the end of each quarter by reporting any debt-restructuring agreement, original loan contract, and evidence that the borrower was able to service the loan (Lindgren et al. 1999). For temporary capital relief, tier-2 participants that met end-2000 LCP rules immediately could write off debt restructuring costs over a five-year period (20% per year); otherwise, tier-2 participants were required to bear the restructuring costs according to the existing regulation (full losses taken by end-2000) (Nimmanahaeminda and Sonakul 1998a; Lindgren et al. 1999). To further incentivize participation, early debt restructuring, and new lending, the availability of tier-2 capital decreased^FThe original Thai press releases do not explain why the amount of available tier-2 capital decreased over time (BOT 1998b). over the facility’s window (ADB 1999; Nimmanahaeminda and Sonakul 1998a).

On August 21, 1998, the Thai government passed an emergency decree (effective August 24) providing MOF the authority to issue up to B300 billion of bonds for the program (Nimmanahaeminda and Sonakul 1998c). The government also had the authority to issue derivative warrants through SET to incentivize private participation the tier-1 (Finance Reporters 1999).

The tier-1 scheme was only available to “potentially viable” commercial banks, finance companies^F“Finance companies are also eligible for the scheme, provided this is part of a consolidation process for the sector. Finance companies may apply to the scheme once BOT clarifies their entitlement to become full-fledged banks” (Koeberle and Sondergaard 1998b)., or finance and securities companies incorporated in Thailand (Santiprabhob 2003; BOT 1998a). The BOT determined viability (Lindgren et al. 1999). To qualify for support, the financial institution had to submit an operational restructuring plan^FPlans included measures to strengthen internal control and risk management, to increase revenues, to cut costs, and to improve internal procedures for alleviating non-performing loans (Lindgren et al. 1999)., which FRAC and the BOT had to approve (Lindgren et al. 1999). Financial institutions intervened by the BOT (or those determined to be necessary in a merger process) had to first finish their restructuring plans to become eligible (BOT 1998a). Before applying, financial institutions had to secure the approval of their Boards of Directors for: (1) the request to participate, (2) the full provisioning requirements^FOn March 31, 1998, the BOT revised regulations on the suspension of income recognition of accrued interest payments, loan classifications, and provisioning requirements to align Thai supervisory regulations with international standards by end-2000 (BOT 1998a)., and (3) the issuance of an amount of preference shares to be sold to the Ministry of Finance and other joint investors (BOT 1998a). All tier-1 applicants had to have positive capital left after fully provisioning against their assets because the existing shareholders needed to bear the cost of NPLs prior to recapitalization (Santiprabhob 2003).

The tier-2 scheme was only available to “potentially viable” commercial banks, finance companies, and finance and securities companies incorporated in Thailand—irrespective of their participation in the tier-1 capital support facility (Lindgren et al. 1999; BOT 1998a). The tier-2 scheme was available to capital-deficient institutions who had experienced losses from debt restructuring, and had increased lending to non-speculative clients (BOT 1998a). Eligibility depended on a legally binding agreement between the debtor and the financial institution (Nimmanahaeminda and Sonakul 1998a). The institution also needed to prove to the BOT that the debtor was able to service its loans for three consecutive payment periods, or for at least three months (Nimmanahaeminda and Sonakul 1998a). Prior to submitting a tier-2 application, the financial institution had to secure approval from its Board of Directors for: (1) the request to participate in the tier-2 scheme, and (2) the issuance of an amount of subordinated debentures to be sold to the Ministry of Finance (BOT 1998a).

Through the tier-1 capital support facility, the Ministry of Finance purchased preferred shares and sold tradeable^FThe Bank of Thailand was not allowed to hold these bonds (Honohan 2001). government bonds (Lindgren et al. 1999). The 10-year government bonds paid a fixed interest rate: 100 basis points below the one-year deposit rate of the five largest Thai banks at the time of the transaction (Honohan 2001). The preferred shares carried equal voting rights with common stock, were non-redeemable, non-cumulative, and convertible to common stock at the shareholder’s option once the participant had taken full provisions (Honohan 2001; The Nation Staff 1999a). According to TISCO Finance’s annual reports, preferred shares could be converted at the end of every quarter at the ratio of 1:1 (TISCO 1999). Otherwise, the preferred shares automatically reverted to common shares ten years after the original date of purchase (TMB 1999b). This new capital had preferred status over existing capital (Lindgren et al. 1999). The tier-1 facility divided new preferred shares into class-A and class-B shares (The Nation Staff 1999c). The government received class-B shares, which had priority over class-A in the event of dividends or returns from liquidation (The Nation Staff 1999c). Class-B shares were second in line to absorb losses on assets that the underlying firm had acquired before issuing new shares (The Nation Staff 1999c). Losses against new assets were written down against class-A and class-B shares proportionately (The Nation Staff 1999c).

Some Thai banks recapitalized without participating in the government’s capital support facilities. They raised capital by issuing short-term, high-cost, hybrid securities called “Stapled Limited Interest Preferred Stock” (SLIPS) and “Capital Augmented Preferred Securities” (CAPS) (Scott 2002, 41; Santiprabhob 2003). Figure 2 depicts the flow of cash and securities between investors and banks that issued SLIPS/CAPS. Banks issued securities into mutual funds, which paired returns from non-cumulative preferred shares with perpetual bonds (Group 1 assets) and pooled high-yield subordinated bonds (Group 2 assets) (Santiprabhob 2003). On behalf of the banks, mutual funds sold investment units of SLIPS/CAPS to investors, who paid with cash; investors were required to purchase the bundled assets and could not select individual securities from within a group (Santiprabhob 2003). Thai financial regulators were willing to count group-1 assets as tier-1 capital because the subordinated bonds were perpetual, inseparable from the preferred shares, and could absorb losses; group-2 assets could count towards tier-2 capital if underlying bonds carried tenure longer than five years (Santiprabhob 2003). The mutual-fund structure enabled banks to raise regulatory capital while minimizing the dilution of outstanding shares (Santiprabhob 2003).

Under the tier-1 support facility, MOF agreed to purchase the preference shares at a “mutually determined fair value,” which could come from an individual company’s book value, market value, or an appraisal from an independent advisor hired by MOF (BOT AER 1999). In practice, the government relied on a combination of the first two measures: the purchase prices partially reflected market estimates, which were mostly based on each company’s book value—after accounting for the effects of full loan-loss provisioning and capital requirements (Santiprabhob 2003; BOT 1998b). FRAC was also responsible for determining the appropriateness of the price prior to the government’s purchase (BOT 1999a).

Though the government could purchase shares for a price lower than par value^FBefore the 21st century, companies used to issue common shares at “par value,” which reflected their investments in cash, goods, and services (Downes and Goodman 1985). Later, companies assigned par value to their newly-issued common shares to determine the dollar accounting value of those shares on their balance sheets (Downes and Goodman 1985). In this context, par value refers to the “original share price determined by the capital level recorded within the participant’s business registry record” (BOT 1998b). For common and preferred shares, par value has no relation to the market value, which is determined by factors such as net asset value, yield, and investors’ expectations about a company’s future earnings (Downes and Goodman 1985)., the government did not have the authority to forcibly lower the participant share’s par value (BOT 1998b).

The preferred share dividend rate was either the same as the common stock dividend rate, or 100 basis points above the government bond interest rate—whichever was lower—but the participant did not have to pay dividends during times of operational loss (Honohan 2001; The Nation Staff 1999a). Though the government could sell the preference shares, the original shareholders had a “right of first refusal” (Honohan 2001). 

Through the tier-2 capital support facility, MOF funded its purchases of subordinated debt by issuing non-tradable government bonds (Lindgren et al. 1999). The 10-year subordinated debt paid an interest rate 100 basis points above the interest rate of the 10-year government bonds, so returns from the capital support facilities covered the government’s financing costs (Lindgren et al. 1999; Santiprabhob 2003). If the participant’s tier-1 level fell below the specified regulatory minimum while it participated in the tier-2 scheme, the participant had the option to convert the tier-2 subordinated bonds into the tier-1 preferred shares (The Nation Staff 1999a).

In late 2000, the BOT allowed financial institutions to include hybrid debt instruments and long-term subordinated debt as part of their tier-2 capital, with minimum maturities of 10 years and five years, respectively (BOT 2000b). This reduced the amount of additional capital that these institutions would need from the government to satisfy their tier-2 capital requirements. For both securities, the financial institutions were required to annually amortize 20% of the capital during the five years preceding the maturity, and the BOT had to permit the financial institution to redeem early (BOT 1999a).

Commercial banks and finance companies did not have to pay interest on hybrid securities or pay dividends on common and preferred shares if they did not make operating profit (BOT 2000c). Postponement of principal and interest payments was only allowed when their payments would lead to a negative capital-to-risk asset ratio, or when the BOT intervened by ordering capital write-downs and recapitalization (BOT 2000c).

On October 24, 1997, the Thai government passed emergency decrees that amended the Commercial Banking Act and Finance Company Act, allowing the BOT to order capital increases or decreases, or to change the management of troubled financial institutions (Lindgren et al. 1999). The BOT wielded this authority in the capital support program by requiring tier-1 participants to agree to make full end-2000 provisions, effectively forcing existing shareholders to bear up-front losses (Lindgren et al. 1999; Honohan 2001). Loan-loss provisioning and capital requirements ensured that the financial institution’s losses were absorbed by common shareholders before the government, but the government was first to receive profit (BOT 1998b).

The government had the right to appoint board members commensurate with the size of its preferred share holding, and the right to nominate at least one board member regardless of the size of the holding (Lindgren et al. 1999; BOT 1998b). The BOT internally considered a policy that mandated the “revamp” of management (Srisukkasem and Kanoksilp 1999). For most tier-1 participants, the government changed the top management and appointed just one or two directors—despite having large shares of ownership in the participating institutions (Santiprabhob 2003). Banks^FFamily-owned banks especially feared government interference (Santiprabhob 2003). were cautious of the management control that they would cede to the government if they were to participate in the tier-1 facility (World Bank 2000a). 

To encourage private investment through the tier-1 capital facility, the government offered new share subscribers three-year covered warrants (“call options”) to purchase the shares that it acquired through recapitalization (Santiprabhob 2003; Finance Reporters 1999). MOF issued the warrants, arranged^FDuring the crisis, the domestic secondary market for derivatives was not fully developed, so the Thai Securities and Exchange Commission (SEC) only authorized securities companies and large shareholders of Thai companies to issue derivative warrants (Finance Reporters 1999). for their listing on the Stock Exchange of Thailand, and required the companies to pay related expenses (TISCO 1999). The exercise price on these options was equal to the government’s investment and holding costs over the three-year period, and investors who purchased preferred shares alongside the government could convert the warrants at a ratio of one warrant to one preferred share (Santiprabhob 2003; TISCO 2001). For at least one bank, Thai Military Bank, new ordinary-share investors received two covered warrants for every one new share they had purchased (TMB 2001). The options suggested that the government was a temporary investor, but that the government would not sell its shares to other investors during the three-year period (Santiprabhob 2003). If the market price rose above the exercise price, the options also provided the government with a natural exit opportunity (Santiprabhob 2003).

In the case of at least one tier-1 capital participant, TISCO Finance, investors who bought preferred shares alongside the government executed nearly all of their covered warrants and effectively acquired the government’s preference shares before the options expired (Santiprabhob 2003; TISCO 2002).

Tier-2 capital support participants sold subordinated debt with tenure, which provided for a natural exit opportunity after the instruments reached maturity. In September 2002, MOF redeemed the bonds that it had sold to TISCO Finance as part of the tier-2 capital support facility in 1999—nearly seven years before the government bonds were scheduled to reach maturity (TISCO 2002).

Though the capital support facilities expired on December 31, 2000, there was no explicit exit strategy to dispose of the government’s remaining preference shares after the program ended and the covered warrants had expired. Following Santiprabhob (2003) and Thai newspapers, the government’s exit strategy was to sell its shares to private investors between four and six years after the beginning of the program (Santiprabhob 2003; The Nation Staff 1999a). 

In 2003, the Thai government created two “Vayupak” mutual funds to invest in domestic corporations that were still facing financial burdens related to the 1997-98 Asian Financial Crisis (Crispin 2003; The Economist 2003). Suchart Jaovisidha, then-Minister of Finance, claimed that the move was meant to free up part of the THB 500 billion ($12 billion) that the government had invested in wholly and partially state-owned enterprises (The Economist 2003). The government seeded the first fund (“Vayupak 1”) with THB 100 billion in capital, purchased some of MOF’s shares of banks and other state-owned enterprises, and guaranteed a minimum 2% return to retail investors—higher than the prevailing 1.25% bank deposit rate—because MOF promised to repurchase shares from the fund at a pre-arranged price after ten years (Crispin 2003; The Economist 2003; Pootpisut 2012). The government installed professional managers to direct the day-to-day operations of Vayupak 1, which traded publicly on the Stock Exchange of Thailand (The Economist 2003).

After the Vayupak 1’s announcement, market participants had mixed opinions. Proponents believed that it could stimulate private investment, soak up excess deposits in commercial banks, and improve the management of government-owned businesses (The Economist 2003). Detractors expressed skepticism about the government’s financial savviness, potential economic inefficiencies, and the viability of the underlying companies (Crispin 2003; The Economist 2003). Vayupak 1 performed better than expected and delivered an average 6% annual return during its first eight years (Vanichkorn 2012). In 2012, the government announced that Vayupak 1 would become open-ended after the ten-year term had expired (Pootpisut 2012). Officials raised additional capital for the new fund, broadened its investments to include public and private infrastructure projects, and did not guarantee returns anymore (Pootpisut 2012).

To prevent banks from having future problems, the government raised supervisory standards and tightened regulations (BIS 1999). In 1998, new regulatory standards required banks and non-bank financial institutions to significantly increase their capital (Vichyanond 2004). Scholars of the Package also draw attention to new loan classification and provisioning (LCP) and capital requirements, in particular.

On March 31, 1998, the BOT raised loan classification, provisioning, and reporting standards to bring Thai financial institutions in line with international standards by end-2000 (Vichyanond 2004). Loan classification became contingent on debtors’ debt servicing capacity, cash flow management and valuation of back-up assets, and ageing of overdue debts (Vichyanond 2004). By the time that the capital support facilities opened in late 1998, financial institutions were adjusting to the following requirements:

To incentivize the entry of foreign capital, government began to loosen restrictions on foreign ownership of Thai financial institutions in 1997 (Santiprabhob 2003). Effective June 27, 1997, the Emergency Decree Amending the Commercial Banking Act B.E. 2505 (No. 2)^FThis is also known as the “Alien Business Law” (ADB 1999). lifted the 25% ceiling on foreign ownership on a case-by-case basis (BOT 2000a). MOF allowed 100% foreign ownership by foreign investors who aimed to resolve or rehabilitate distressed financial institutions (BOT 2000a). With MOF approval, foreigners could possess majority ownership of locally incorporated financial institutions for up to 10 years; thereafter, the foreign owners could not acquire additional shares until the ownership interest (existing and new holdings) was maintained at 49% or less (Treasury 1998; BOT 2000a). Beginning in November 1998, MOF approval was no longer necessary for majority foreign ownership of Thai financial institutions (Treasury 1998). In the years immediately following the crisis, foreign ownership of Thai financial institutions increased through foreigners: (1.) purchasing a majority stake in private financial institutions from former Thai shareholders, (2.) purchasing a majority stake in privatized banks, or (3.) participating in new capital injections of financial institutions—particularly large private banks (Santiprabhob 2003).