Interference by BOT puts dampers on recovery efforts
Attempts to rescue the ailing financial system have wandered significantly from the original concept and Thanong Khanthong reports bureaucracy is still being allowed to hinder economic recovery.
International investment banks are ready to put together a financial package worth Bt20 billion to Bt30 billion for the Asset Management Corp (AMC) to bail out the bad assets in the Thai financial system, says a Hong Kong-based investment analyst.
Yet, the AMC will not be able to tap this source of funding because its role has been watered down to that of a mere broker helping to facilitate the transfer of bad assets. This is one of several examples demonstrating how local bank officials have badly mismanaged their mission to restore confidence to the creaky financial system. Originally, the AMC was designed as a "bad bank" which would be capitalised at Bt10 billion. This amount would be good enough for the agency to lend out 12 times more to buy up the bad assets of the troubled finance companies and banks.
The AMC, which would have come under the supervision of the Financial Restructuring Authority (FRA), would then refrigerate the bad assets until it could find buyers, or until the economy picks up. The bad debts in the financial system, which are believed to top Bt1.2 trillion or more than 25 per cent of the total loans in the system, must be dealt with decisively if the country hopes to regain the confidence of international creditors and investors.
Instead, the role of the AMC has been reduced to that of broker, serving to bring the sellers and buyers of bad assets to the negotiating table. Capitalised at Bt1 billion, it will earn commission from the transactions. But the problem right now is that there will not be any buyers for the bad assets even though prices are expected to be discounted by a sharp 50 per cent. The AMC should have set a floor value for the bad assets so international investors could move in and buy them up. At this point, there have not been any transactions because finance companies and banks are also unwilling to let go of their assets.
Since banks and finance companies are required to set aside an additional 25 per cent in reserves for non-performing loans, they will face a big hit on their assets if the bad assets they are holding are discounted by 50 per cent.
Since the AMC will need to raise a huge amount of money to the tune of Bt20 billion to Bt30 billion to tackle the bad assets it will need to be underwritten by either the government or foreign financial institutions.
Committing the government to underwrite the AMC might run against the conditions the government agreed to with the International Monetary Fund (IMF) in return for a $17.2-billion bail-out fund. Therefore, foreigners should be brought in to underwrite the AMC's capital mobilisation.
Financial sources said IMF officials have complained that Thai authorities have gone in the opposite direction in tackling of ailing financial system.
Instead of being allowed to act independently under the supervision of the FRA, the AMC has come under the supervision of the Bank of Thailand (BOT). In fact the FRA and the AMC, which would operate independently from the BOT, were drafted in the same executive decree package.
Bhokin Palakula, then PM's Office minister, was assigned by former prime minister Chavalit Yongchaiyudh to prepare all six executive decrees which form a legal framework to resolve the ailing financial system.
"Bhokin did not realise that the BOT sought a change in the wording of the decrees so it could vet any decisions of the FRA or the AMC," a source said.
Since the Chat Pattana and New Aspiration parties had revealed their desire to interfere in the rescue of the ailing finance companies, BOT officials may have decided amongst themselves that it would be safer to bring the FRA and the AMC under their scrutiny.
In the end, the FRA has been watered down to assuming the responsibility for rehabilitating the 58 suspended finance companies, with the AMC as its asset broker arm. The remaining 33 finance companies and 15 commercial banks come under the direct supervision of the BOT, which ironically has been entrusted with greater power under the new laws to impose life or death sentences on these shaky companies.
The BOT still effectively calls the shots in its dealings with all the banks and finance companies, even though it has proven incapable in its supervisory capacity.
If the financial system faces a systemic risk of Bt1.2 trillion in bad debts, the authorities must come up with a package adequate to cope with this problem. Without a credible or workable package, it will be impossible to restore confidence in the financial system.
Initially, the IMF wanted the FRA to be a truly independent agency which would also be entrusted with the challenging task of reforming and shaping the financial system.
A committee to supervise the banks and finance companies would also be set up with a new law to remove the supervision and examination of the banks and finance companies from the BOT, limiting the central bank's role to managing the monetary policy. But this proposal was also scrapped.
Instead of assigning the brightest and most capable people who understand the markets to run the FRA and the AMC, the two agencies are to be run by a bunch of bureaucrats. The Thai way of resolving problems does generally tend to create more problems than solutions.