THE downfall of Bangkok Metropolitan Bank represents the beginning of the end of the saga surrounding the family-controlled bank that for five decades symbolised Thailand's business heartland.

By ordering the BMB to write down shareholder equity to the bone, the banking regulators have finally overcome their reluctance to confront politically well-connected family banks.

The shareholders of BMB will immediately feel the pinch, for they will witness a wipe-out of their equity after the bank has been nationalised. BMB will effectively undergo a capital reduction to write off its bad debts. In the process, the bank's par value of Bt10 per share will shrink to only Bt0.01.

After converting its short-term loans of Bt25 billion to BMB into equity, the Financial Institutions Development Fund will emerge as a 99.99 per cent shareholder. The shareholders' wealth in BMB will fall to Bt16 million.

Liquor tycoon Charoen Sirivadhanabhakdi, whose First Bangkok City Bank is the target of a takeover by Citibank NA, will feel more pain than the Tejaphaibul family. He is believed to have controlled about 30 per cent of BMB, compared to about 12 per cent for the Tejaphaibuls. However, the Tejaphaibuls had been running the bank for more than four decades.

The key question is how much money the bail-out fund will stand to lose from this equity cleansing since BMB's bad debts have already wiped out its net worth. The FIDF will have to realise a loss immediately on the balance of BMB's bad debts which the original Bt11 billion in equity cannot cover.

The loss cannot be quantified since the banking regulators have declined to cite BMB's estimated non-performing loans or bad debts. For the sake of guessing, the FIDF loss in BMB alone could reach Bt5 billion or Bt10 billion.

''The way the banking regulators tackle BMB makes it look like they are trying to give away money to a corpse,'' said a banking expert, who sharply criticised the banking authorities for taking drastic action only when a bank is broke.

As of November last year, BMB's total assets stood at Bt205 billion, of which Bt178 billion were loans. Deposits fell to Bt92 billion after the bank faced a loss of confidence, forcing it to rely on short-term loans from the FIDF as a life-support system.

For years the Tejaphaibul family, headed by patriarch Udane Tejaphaibul, demonstrated flaws in running BMB, one of the weakest banks in the system. The bank had been burdened with the task of financing family subsidiaries, principally liquor and real estate businesses, until it saddled itself with mountains of bad debts.

Apart from its narrow customer base of Chinese-Thai entrepreneurs, BMB had missed opportunities to develop a strong core business to keep up with the modernisation of the Thai economy.

Over the past two or three years, BMB has come under severe recapitalisation pressure, requiring about Bt8.9 billion in fresh capital. However, the shareholders did not have the money to recapitalise, nor were they successful in trying to find a new foreign partner.

BMB's financial shape is so bad that most investment analysts do not cover the bank in their reports to clients.

Instead of taking early action on BMB, the banking authorities allowed the management to buy time until they discovered in November last year that the bank had been operating with a negative net worth. When a bank faces a negative net worth, it has no right to take public deposits or lend money.

An executive of a foreign bank said the Tejaphaibuls had been warned by creditors since last year to release their grip on BMB when it appeared they could not steer it out of trouble.

''We told them to face reality. History wouldn't repeat itself. The longer they delayed to call it quits, the more pain they would experience. And they would not be able to help protect the name of the family,'' the executive said. ''By the way, they only control about 12 per cent in the bank. The rest belongs to the public. It is a public bank, not a family bank.''

During this episode, BMB engaged in takeover talks with United Overseas Chinese Bank of Taiwan. However, it appeared there was no serious commitment on the part of management to undergo painful adjustments. Most of the management changes in the past were merely cosmetic.

In the end, the family had to be forced into making the painful change when it became clear BMB was completely broke and it was necessary to save the banking system as a whole.

The next question is: Who's next?

Other family banks must be watching the fall of BMB in dismay, for they can easily be next if they fail to adjust, raise fresh capital, seek new foreign partners and introduce professional management.

Siam City Bank, which does not have a core family holding group, is likely to face similar action if it fails to raise new capital. ING Bank of the Netherlands recently decided against buying into the bank after SCIB failed to raise capital from its existing shareholders.

It is now a big dilemma for shareholders of family banks, the Sophonpanichs, the Lamsams and the Phatraprasiths, as to how much to recapitalise their banks to fulfil the tough capital adequacy requirements.

Since the economy has yet to bottom out, the non-performing loans of their banks are rising fast. The pressure of loan-loss provisions, capital adequacy requirements and recapitalisation will eventually leave Thai banks in the hands of foreign institutions which have money.

This is what the family banks don't want to happen. Yet, foreign ownership and management control are inevitable. The expertise, the discipline and the technology the foreign banks bring will ultimately change the face of the Thai banking industry.

Bangkok Bank, which has the largest exposure to the Thai economy due to its sheer size, will need to recapitalise. It is reported that BBL is trying to raise money by selling its overseas assets.

Thai Farmers Bank displayed foresight and is well ahead of its peers with its re-engineering programme which cost only Bt2.5-Bt3.0 billion. It is planning to double its capital to about Bt16 billion through a private placement to foreign institutional investors.

''The (family banks) must have been sleeping with bad headaches every night. How much money have they to throw into their banks? Is it worthwhile? If the bad debts are huge, no amount will be enough,'' said an executive of a finance company.