Thailand: Financial Institutions Development Fund Liquidity Support

The minutes of crisis-era BOT meetings are not public, so it is difficult to pin down the FIDF’s precise mandate. A parliamentary commission investigated the FIDF and wrote that the BOT considered liquidity support only as a measure to buy time (Nukul Commission 1998), while the BOT governor said, “The bank did it because it wanted to boost the liquidity of the financial sector” to resolve a crisis of confidence (Meesane and Tunyasiri 1998). As an institution, FIDF’s stated purpose from its creation was “reconstructing and developing the financial institution system to accord its strength and stability,” and it was not configured to respond quickly to a financial crisis (BOT 2018).

A royal decree in 1985 first created the FIDF as a legally distinct entity within the BOT (2018). At the onset of the crisis, FIDF’s powers included lending money, investing in financial institutions, and supporting creditors (World Bank 1990). In 1997, liquidity problems deepened to threaten finance company creditors, prompting an emergency decree in October that allowed the FIDF to relax collateral requirements when the FIDF’s board of directors “deem[ed] it necessary to restore the fairness and soundness of financial system” (Emergency Decree B.E. 2540 1997).

No other government bodies coordinated with the FIDF to support Thailand’s domestic institutions. Coordinated measures began only after the 58 finance companies were suspended and the support was made public.

Though legislation made the FIDF a separate legal entity, it was controlled by the BOT. The board of directors was part of the central bank; the BOT governor chaired the board of directors; and BOT officials appointed the FIDF manager. The former BOT governor said that board members were not likely to disagree with BOT experts (Santiprabhob 2021). A former manager of the Fund said that each loan larger than THB 50,000 required the BOT governor’s approval (Yuthamanop 1998).

Cabinet members suggested that the BOT had a legal responsibility to report FIDF activities, though primary source documents and academic works considering the disclosure framework of the FIDF were not found. It seems clear that the FIDF was accountable only to the BOT in practice. In 1998, Parliament created the Nukul Commission to identify the causes of the crisis and to review the FIDF’s support of distressed financial institutions. Its report said that the FIDF:

itself lack[ed] independence. To inspect any institution’s financial position, it had to depend on the BOT’s Financial Institutions Supervision and Examination Department. In order to expedite action by the Fund, the management board of the Fund has given broad powers to the Chairman (who is also BOT’s governor), rendering it incapable of scrutinising BOT’s action carefully (Nukul Commission 1998).

There is little information on how the FIDF selected counterparties. When the BOT suspended 16 finance companies in June, it cited their capital and liquidity needs (Lindgren et al. 2000). The BOT governor said that market observers viewed the suspensions with suspicion because the BOT did not give the criteria it used to identify undercapitalized firms (Santiprabhob 2003). When the BOT later suspended 42 more finance companies, it again cited concerns about their solvency, but a World Bank report said that the FIDF had made the decision based on the companies’ level of indebtedness (World Bank 1997). The World Bank noted that the regulatory framework did not allow authorities to quickly monitor the health of finance companies and banks. For instance, loans were considered performing until 12 months of delinquency, which overestimated asset quality (Haksar and Giorgianni 2000). As a result, the FIDF—which had little permanent staff and borrowed officials from the BOT—relied on prior bank examinations when it loaned to finance companies (Santiprabhob 2021).

The Bank of Thailand Act (BOT 2018) allowed the FIDF to transact with any counterparty. In practice, the FIDF was created to support nonbank finance companies, of which there were 91 in 1997. During the first part of the year, FIDF lending to finance companies grew significantly, from THB 16.8 billion at the end of 1996 to THB 410.6 billion at the end of July, immediately before the second round of suspensions (BOT 2009a). The size of these institutions relative to Thailand’s financial sector is not known, but 58 of these finance companies—those that were suspended by the BOT in June and August 1997—represented the majority of Thailand’s finance companies and 14% of its financial sector (Haksar and Giorgianni 2000). The FIDF also provided loans to several banks. The public was aware that the four banks were distressed but not that they were receiving aid at the scale that the FIDF provided; these banks were Bangkok Metropolitan, First City, Siam City, and Bangkok Bank of Commerce.

The Bank of Thailand Act (BOT 2018) allowed the BOT to allocate money from its reserves to the FIDF, but, in practice, the FIDF issued debt and entered repurchase agreements to finance its liquidity support. In July 1996, the FIDF board decided to issue its first THB 10 billion in bonds “to fund the system’s mushrooming liquidity needs” (Nukul Commission 1998). The BOT, along with commercial banks, purchased these bonds (Lindgren et al. 2000, 95). But the FIDF could not issue long-term bonds, and Santiprabhob (2021) suggested that the FIDF would need substantial BOT subscription to provide several hundred billion baht in support. However, as the central bank, the BOT could not purchase unlimited amounts of FIDF bonds, lest it violate legal restrictions on financing government activities.

More substantial was the FIDF’s repo activity. These borrowings amounted to as much as THB 350 billion a month (BOT 2006). Santiprabhob (2003; 2021) described a circular flow of funds (see Figure 2) between weaker financial institutions, healthy—and often foreign—commercial banks, and the FIDF. As depositors fled the weak institutions, they deposited money in healthy commercial banks. To support weak institutions, the FIDF lent short-term funds by borrowing from those healthy banks. Seven-day repo rates in excess of 14% prevailed for a year starting in July 1997 (Suthiwart-Narueput and Pradittatsanee 1999), but the FIDF continued to refinance these agreements multiple times a week as depositors fled the weak finance companies for the FIDF’s creditors (Santiprabhob 2003). The FIDF decided to use repos to keep liquidity support short to prevent the courts from finding that the FIDF’s intervention amounted to capital support (Santiprabhob 2021).

The FIDF provided increasing amounts of support to finance companies during the first part of 1997. Amounts outstanding stood at THB 16.8 billion at the end of 1996 and rose dramatically, beginning in February, to peak at THB 434 billion at the end of August, shortly after suspension of an additional 42 finance companies was announced (BOT 2009a). The FIDF continued to provide funding to closed and open finance companies and to some banks through the end of the year, when 56 of the 58 suspended finance companies were closed permanently. Such funding also continued into 1998, as the FIDF pursued its restructuring programs (Hasker and Giorgianni 2000; World Bank 1997).

No documents suggest that the FIDF capped participants’ borrowing limits. Some finance companies borrowed more than four times the value of their capital (Lindgren et al. 2000).

In late 1997, the BOT tied rates to the BOT repo rate plus a variable penalty between 1% and 2.5%, depending on the level of indebtedness and size of support if uncollateralized (World Bank 1997). As shown in Figure 3, this rate sometimes exceeded 20% in 1997 and 1998.

Santiprabhob (2021) and a BOT official working in 1997 said that the rates for liquidity support were at market prices or slightly above, in keeping with lender-of-last-resort principles. However, the World Bank (1997) said that the FIDF provided support at below-market rates between March 1997 and July 1997. The World Bank cited the FIDF’s decision to not impose penalty rates as a cause of its ballooning liabilities.

After the support ended, many companies (especially those finance companies that the BOT suspended) faced difficulties repaying their debts. The Fund allowed debtors to submit rehabilitation plans and extend the length of repayment up to eight years. The FIDF charged a penalty rate to suspended institutions when compared to nonsuspended institutions (World Bank 1997), though very little of this rehabilitated debt would ultimately be repaid (BOT 2009a).

FIDF support originally required government bonds as collateral, but finance companies began shedding their liquid assets in the summer of 1997 amid deposit runs. As these runs intensified, the FIDF began providing support against collateral of dubious value, including promissory notes of finance company debtors that would ultimately be worthless when many of those issuers entered bankruptcy (Santiprabhob 2003). Additionally, much of the collateral the FIDF required was not perfected (World Bank 1997).

Following the suspension of 58 finance companies in August 1997, the government weighed two actions that could free up FIDF collateral to recovery by private creditors: the release of the FIDF’s preferential claims on debtor collateral and the provision of unsecured liquidity support by the FIDF. If the FIDF could not release the collateral securing its emergency loans to finance companies, then the bankruptcy of a finance company would simply push its nonperforming loans to its creditors, shielding the FIDF at the expense of the financial sector it was created to protect. In October, Emergency Decree B.E. 2540 (1997) granted the FIDF the authority both to release collateral and to make new unsecured loans.

If the FIDF provided liquidity support at a standard maturity, the documents surveyed do not indicate what that may have been. Santiprabhob (2021) suggested that credit was on-call for a short term. Given that the structure of funding was tied to seven-day repurchase agreements, support may have carried seven-day maturities. In any case, the MOF closed 56 of the 58 suspended finance companies in December 1997, before those companies repaid their debts. The MOF’s announcement ended the FIDF’s large-scale liquidity support of finance companies (Haksar and Giorgianni 2000), leaving the FIDF with more than THB 400 billion in unpaid claims on finance companies (BOT 2006; Lauridsen 1998). (For a breakdown of support by whether finance company counterparties were open or closed, see Haksar and Giorgianni 2000.) FIDF crisis intervention ended in January 1998, after the government nationalized four commercial banks (Lauridsen 1998). As markets calmed, the FIDF continued to provide liquidity through the end of the 1990s (see Figure 1) and operated well after the end of the Asian Financial Crisis.

Support did not appear to carry any other conditions. After the undisclosed support ended, the FIDF imposed conditions on borrowing from the credit line.

Documents surveyed do not discuss the transmission of BOT monetary policy.

Though Thailand had no deposit guarantee prior to 1997, observers such as the World Bank (1990) believed that it was widely assumed that the FIDF and government offered an implicit guarantee that it would not let depositors sustain a loss of their monies on deposit. The FIDF (1997) made this guarantee explicit in 1997, when it insured “all depositors and creditors of financial institutions that still operate[d] normal business” for two years (Mehta 1997). The FIDF pledged to pay those insured within 30 days of their claims. There does not appear to have been a cap on account or credit sizes, though the FIDF would not pay excessive interest rates over those offered by the largest Thai commercial banks (FIDF 1997).

The FIDF financed this blanket guarantee by issuing its government-backed bonds (FIDF 1997). “Despite, or perhaps because of, the large fiscal cost of the government’s emergency guarantee of deposits, the market did not view the move as credible” (Nabi and Shivakumar 2001). However, the government was still responsible for paying out to depositors and creditors, lest it be viewed as even less credible. The World Bank (1997) said that measures such as the blanket guarantee increased the cost of the crisis to the Thai government.

Research did not determine similar programs in other countries at the time.

When the Thai Parliament learned of the extent of borrowing, the FIDF had already lent several hundred billion baht. The first indications came in early July, when a Member of Parliament accused the Prime Minister of wasting some THB 350 billion to rescue finance companies (Tumcharoen 1997). This episode appeared to have gone unnoticed. A month later, however, the BOT suffered a storm of criticism after it reported lending THB 430 billion—about 10% of GDP (Lauridsen 1998)—to finance companies before their suspension and ultimate failure (Tunyasiri 1997; Prateepchaikul 1997). At this point, the Prime Minister defended the FIDF on the basis that it had secured collateral against the loans (Tunyasiri 1997). The Minister of Finance said that the collateral outweighed the liquidity support by THB 800 billion to THB 500 billion (Notharit 1997).

Moreover, the BOT had “repeatedly guaranteed” the viability of the same finance companies that had received liquidity support (Santiprabhob 2003). When the BOT announced in March 1997 that ten finance companies needed to raise capital, it assured the solvency of the rest of the subsector. When the BOT announced in June 1997 that it would suspend 16 finance companies over capital inadequacy concerns, it again assured the market that the remaining finance companies were in good financial health, and that it would suspend no more finance companies (Lindgren et al. 2000). So, when it suspended 42 additional finance companies, the subsequent announcement of a deposit guarantee and credit line was unable to assuage concerns (Santiprabhob 2003).

In late 1997, the MOF committed to reflecting the FIDF cost explicitly in the Thai budget as part of a World Bank loan proposal (World Bank 1997). Following budgets and policy papers communicated the outstanding FIDF debt (BOT 2002; Suthiwart-Narueput and Pradittatsanee 1999; Public Debt Management Office 2021).

As discussed, the FIDF did not disclose its support until after finance companies were suspended. Knowledge of the THB 430 billion liability came through the BOT’s balance-sheet reporting. It is unclear, however, what responsibility or power the FIDF had to disclose its support. The FIDF did not disclose how much it lent to each institution.

No documents discussed the BOT’s strategy for dealing with borrower stigma. However, the decision not to disclose liquidity support prevented market observers from stigmatizing the borrowers. Market participants suspected that more finance companies than the BOT reported were in danger, but they did not know which faced the gravest peril (Santiprabhob 2003).

There was no predetermined end date for FIDF intervention, but Santiprabhob (2021) cited the cost of borrowing as an incentive for borrowers to find other lenders. Support effectively ended when the possibilities for repayment ended. After the BOT suspended 16 finance companies in June 1997, the MOF established a committee to facilitate their merger and consolidation with Krung Thai Thanakit (KTT), a state-owned finance company (Santiprabhob 2003; Haksar and Giorgianni 2000). Another 42 finance companies were suspended in August and given 60 days to submit rehabilitation plans. In December, the MOF announced the closure of all but two of the 58 suspended firms (Haksar and Giorgianni 2000).

The Financial Sector Restructuring Authority (FRA)—created out of the committee that reviewed the first 16 suspensions (Santiprabhob 2003)—assumed the assets of closed finance companies; it began auctions and reached agreements to compensate creditors of the 42 companies later suspended. As of 2000, the FRA had recovered 28% of the THB 666 billion in nominal assets of the 56 finance companies (Haksar and Giorgianni 2000).

The FIDF took a different approach to the commercial banks to which it had provided emergency liquidity. Four banks to which the FIDF had provided large amounts of liquidity—Bangkok Metropolitan, First City, Siam City, and Bangkok Bank of Commerce—saw their FIDF claims converted to equity while shareholder capital was simultaneously written down (Lauridsen 1998). This mechanism sometimes overcapitalized the banks, which had returned THB 195 billion of capital to FIDF as of 2002 (Santiprabhob 2003).^FFIDF converted debt of the four commercial banks and Bank Thailand into equity that it then spread to state-owned Krung Thai Bank (KTB; see Santiprabhob 2003 for an account of KTB’s recapitalization).

The FIDF lost at least THB 244 billion from liquidity support (Santiprabhob 2003, tables 5.2 and 6.2). There is both uncertainty and ambiguity in these estimates. The uncertainty comes from the fact that recovery could come from a number of different sources, each of which owed the FIDF for more than just liquidity support. Finance companies could have repaid loans before their closure (if they were among those closed), but these repayments cannot be disentangled from the finance company liabilities added during 1997 (BOT 2003). Ambiguity comes from the different definitions of liquidity support among the documents surveyed. For example, Teo et al. (2000, 95) includes a measure of the debt-to-equity conversion without describing its calculation, and claims that FIDF liabilities eclipsed THB 1 trillion. On the other hand, the BOT (2002) describes funds lost to liquidity support, deposit insurance, and recapitalization, all of which could conceivably be debited to liquidity support.