Download Dealing With Systemic Crisis

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
A. Causes
B. Evolution and Impact of the Dual Systemic
Crisis
C. Crisis Management
D. Lessons Learnt
E. Current Conditions
F. On-going Efforts
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A. Causes
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a. Main causes of the crisis
i. Loss of competitiveness, fixed exchange rate
regime, and FX intervention policy
ii. Financial institution governance and
supervision
iii. Contagion Effect
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b. Factors which magnified problems
i.
Policy-making process and administration:
Lack of timely decision making
ii. Structure of economy and financial system
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B. Evolution and Impact of
the Dual Systemic Crisis
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i. Prior to float of Baht
•
•
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•
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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
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ii.
After float of Baht in July 1997
• 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.
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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 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
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C. Crisis Management
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a. Government Role
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
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a. 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.
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a. Government Role
(continued)
 Financial institutions intervention, merger,
and privatization (continued)
 Objectives of resolution strategies:
1. Be cost-efficient
2. Facilitate consolidation of the banking
sector
3. Ensure credibility and transparency
4. Enhance confidence in the banking system
5. Ensure consistency with the capital support
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facilities
a. Government Role
(continued)

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.
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a. Government Role
(continued)
ii. Measures to strengthen financial
institutions 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
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a. Government Role
(continued)
ii. Measures to strengthen financial
institutions system and increase confidence
(continued)
 NPL Resolutions
 Establishment of organizations to
facilitate the financial sector reform and
debt restructuring
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b. Industry Role
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
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b. Industry Role
(continued)
iii. Management reform
•
•
•
•
•
Good governance
Reorganization
Staff development
Improve internal audit standard
Implement effective tools and system for
risk management
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c. Cost of
the Financial Crisis
• 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.
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D. Lessons Learnt
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.
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D. Lessons Learnt
c. Shutting down large number of FIs without
separation of viable borrowers and safetynet 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.21
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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E. Current Conditions (continued)
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.
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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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F. On-going Efforts
• 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
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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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