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Santa Claus comes to the rescue again

 

THE Financial Institutions Development Fund (FIDF) will immediately lose Bt6.51 billion from its venture to bail out the troubled Bangkok Metropolitan Bank (BMB) following a write-down of BMB's equity by a staggering Bt23.21 billion to clean up its messy loan books.

As usual, nobody is going to question how or why the FIDF, the government's bail-out arm, threw money at BMB in the first place.

The bank, controlled by the Tejaphaibul family, was suffering from insolvency rather than a liquidity crisis. Giving money to an insolvent bank is like trying to fill a well with a spoonful of sand. It will never be enough.

The FIDF, which has blood in its eyes in the wake of the banking distress, has extended between Bt60 billion and Bt70 billion in short-term loans to BMB, which suffered from a deposit run. Since it is impossible to rehabilitate BMB -- with 43 per cent in non-performing loans (or about Bt88.9 billion) from its total risk assets of 196.33 billion -- the FIDF has decided to act like Santa Claus. It will convert Bt25 billion of its loans to the bank into equity.

Even after writing down BMB's total equity of Bt16.70 billion, the bank will still post a negative equity of minus Bt6.51 billion. But this negative equity will be wholly assumed by the FIDF, which will suffer an immediate loss of Bt6.51 billion in the equity conversion process.

A question can be conveniently posed as to what kind of authority, or judgement, the board of directors of the FIDF has exercised in its discriminatory, ill-conceived practice of helping out a very bad bank. Are the bail-out figures based on the liquidation value or the ongoing value of BMB? If the figures are based on the ongoing value, the FIDF will lose more money down the road.

The banking regulators would like to lead the public into believing that its drastic action to write down BMB's shares to the bone represents a departing point in dealing with the systemic risk of the financial system. They might also want to drive the message home that the equity write-down marks a good start to cleaning up the bank's bad debts.

And finally, the recapitalisation of BMB, which will post new equity of Bt18.48 billion or a capital adequacy ratio of 9.42 per cent, will put the bank back on track -- albeit via the socialist method of nationalisation -- so that five or six years down the road the FIDF will reap a capital gain once the banking system becomes healthier.

That's an old story.

By converting its loans into equity in BMB the FIDF has blocked its exit from the bank. It has lately been borrowing at 18 per cent by issuing bonds and lending the money out at, say, 24 per cent to the troubled bank. The FIDF will lose the chance to earn from the interest spread after the equity conversion. In the end, the FIDF will have to service the 18 per cent interest on its borrowings.

Where will the money come from? Since the International Monetary Fund will not permit the Bank of Thailand to print money for the FIDF, the alternative is to get money from the budget at a time when tax revenue is shrinking and the government is facing an uphill battle balancing its books. The burden of helping BMB and other bad banks will be borne by the Thai public in this generation and next.

There have been recommendations that instead of trying to change the insolvent banks' equity, which is not the way to solve the problem, the banking regulators should rather tackle the quality of their assets. The concept of the Asset Management Corp is fine since it is mandated to separate the good and bad assets so that full attention can be focused on tackling the bad assets and the financial institutions will have cleaner balance sheets.

With several other banks facing problems similar to BMB, it remains to be seen how much more money the FIDF will throw at them.

BY THANONG KHANTHONG and VATCHARA CHAROONSANTIKUL

 

 

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