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Tarrin trumpets banks' stability

August 12, 1999 -- A YEAR after the creation of the Aug 14 Banking Restructuring Programme, Finance Minister Tarrin Nimmanahaeminda said that the government's attempts to underwrite the Thai banking system had led to stability and enhanced the banks' solvency prospects.

He added that some Thai banks were also likely to report profits for the first time this year after two disastrous years.

Since 1998, Thai banks had raised new capital, including Stapled Limited Interest Preferred Shares (Slips) or Capital Augmented Preferred Shares (Caps), totalling a combined Bt775 billion.

''Krung Thai Bank and other banks are going to raise capital by another Bt180 billion. So the system will end up having an equity base of more than Bt950 billion,'' Tarrin said.

Since Thai banks already had existing equity of Bt500 billion, the total would reach Bt1.45 trillion. If the 1998 losses of Bt400 billion were taken into account, banks would end up this year with an equity of Bt1.05 trillion.

On the other hand, the banks were suffering from the burden of non-performing loans (NPLs), which had reached 47 per cent of their total loan books, or about Bt2.7 trillion.

Tarrin said that if the NPLs, at worst, were to rise further to Bt2.8 trillion, banks would still be able to manage their solvency prospects.

The banks had reappraised the collateral of the NPLs to produce the overall figure of Bt1.3 trillion.

Adding the Bt1.3 trillion in collateral to the equity of the banks after 1998 losses, the banking system would be carrying Bt2.35 trillion in equity to cushion potential losses from the total NPLs of Bt2.8 trillion.

In the end, the banks needed only Bt400 billion in fresh equity to fill up the black hole.

''We have to admit that the situation has significantly improved from last year when all the analysts asked how the Thai banks were going to raise capital because they also knew that the NPLs would be rising,'' Tarrin said.

''Now we can see that the situation is not too bad, with some banks telling me that they may make profits for the first time this year.''

The ability of Thai banks to raise equity could be attributed to measures implemented in the past to restore macroeconomic stability.

The Aug 14 Banking Restructuring Programme provided another cushion for Thai banks so that in the worst-case scenario they could turn to public money, with strict conditions attached, as the last resort to recapitalise.

''I have never said that the package is a sweeping measure to tackle the banking system,'' Tarrin said, countering criticisms that the package is not comprehensive enough to deal with the banking distress.

''But the package represents simply an underwriting of the banking system so that if banks fail to have enough capital, they can turn to this package for help. There is no mandatory requirement for the banks to enter into this scheme.''

The banking reform package amounted to a wholesale underwriting of the Thai banking system at a time when public confidence in the banks was waning.

There was a constant outflow of money from the banking system, with the Financial Institution and Development Fund pumping in new money to replace the outflow.

It was indeed a time of crisis because the Russian rouble was collapsing, Latin America was teetering into the turmoil, and the international capital markets had shut their doors to Thai banks.

There are three components in the banking reform package.

First, it provides a last-resort support to assure solvency to the banking system.

Second, it outlines measures to deal with the banks that the Thai authorities have intervened in. This process has encompassed six banks and six finance companies, apart from the 56 permanently closed down in 1997.

Third, it sets aside Bt300 billion in tier-1 and tier-2 capital support, with a string of conditions attached, to banks.

Only the Siam Commercial Bank has so far tapped tier-1 capital support from the banking reform package by drawing about Bt30 billion. Thai Military Bank is another bank that is considering entering the scheme. Krung Thai Bank will be receiving direct capital injection from the authorities. Thai Danu Bank and Bank of Asia have been bought out by foreign banks.

Only three banks -- Bangkok Bank, Thai Farmers Bank and Bank of Ayudhya -- have managed to stay independent. The remaining six banks have been intervened in by the authorities and are in the process of being merged or privatised.

Note: The first of series to examine the impact of the Aug 14 Banking Restructuring Programme, which is approaching its first anniversary this Saturday.




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