THE radical step by banking regulators to nationalise First Bangkok City Bank, Siam City Bank, Bangkok Bank of Commerce and Bangkok Metropolitan Bank should be sending a cautious message about the asset quality of other banks, investment analysts have warned.

The recent upswing of the stock premiums -- particularly the premiums on the foreign board -- of Siam Commercial Bank, Thai Farmers Bank or Bangkok Bank is not justified, for these big banks have yet to discount the bad debts they are holding in their loan books. SCB shares Monday closed at Bt75 on the local board and Bt104 on the foreign board, TFB at Bt87 on the local board and Bt140 on the foreign board, and BBL at Bt97.50 on the local board and Bt152 on the foreign board.

''The market's exuberance is an overreaction and is due for a correction because the fundamentals have not changed,'' said Dominique Maire, an economist at UBS Securities (East Asia) Ltd.

But Maire and other investment analysts said the financial markets welcomed the radical measures to write down the equity of the four medium-scale banks and nationalise them because there was no alternative, even though the public costs in doing so and the full impact on the economy have not yet been quantified.

First Bangkok City Bank (assets: Bt315 billion), Siam City Bank (Bt217 billion), Bangkok Metropolitan Bank (Bt191 billion) and Bangkok Bank of Commerce (Bt160 billion) account for a combined Bt883 billion, or 16 per cent, of the country's banking system. Incidentally, their combined assets are almost equal to the combined assets of the now-defunct 56 finance companies, which are now undergoing the process of liquidation.

Since the Financial Institution Development Fund (FIDF) will be converting its short-term loans to these four banks into equity, it will suffer an immediate equity loss of a combined Bt42 billion. The FIDF, a bail-out arm of the Bank of Thailand, is a shareholder of the banks, with the exception of Bangkok Metropolitan Bank, and their equity bases have already been written down to the bone. Bangkok Metropolitan Bank has faced a write-down of Bt23.22 billion, compared to Bt9.99 billion for First Bangkok City Bank, Bt5.54 billion for Siam City Bank and Bt33.76 billion for Bangkok Bank of Commerce. As a result, the par value of their shares has been diluted to Bt0.01, Bt0.01, Bt1 and Bt0.50 respectively.

''The damages at these four banks raises immediate questions about the quality of the supervision of the banking regulators and the inefficiency of the management of the banks,'' said an investment analyst at Dresdner Kleinwort Benson.

''Before, we heard only praises for Dr Som [Jatusripitak, the former president of Siam City Bank] who was named Banker of the Year. We also heard a story about the turnaround of Siam City Bank and the trumpeting of its repayment of a Bt3.5-billion soft loan to the banking authorities. But when the recession hit Thailand, we found out who was conservative or not and who lacked quality. The fact that this bank has been forced to write down its capital until its par value is worth Bt1 is quite revealing.''

The investment analyst, however, supported the government's move to take drastic action against these banks, even though the timing was too slow.

Other analysts also criticised the government for its delay in tackling these ailing banks, as a result of which the government must end up footing bigger bills. Except for Siam City Bank, the banks are suffering from negative net worth, which means that they would not have enough money to return to their depositors or creditors once they have liquidated their assets.

Deputy Finance Minister Phisit Lee-ahtam sought to calm the growing criticism of the government's costly bail-out for these banks by assuring that it was a necessity. ''Since we don't have a policy to allow more banks to fail, because we have come this far, we've got to lend assistance. We really don't want the depositors or those involved to run into trouble. The central bank has tried to find the best possible option. And I would like to confirm that this option is the best possible for everybody,'' he said.

So far, the FIDF has lent out more than Bt1 trillion in keeping the financial system from falling on its knees. Of this amount, Bt450 billion went to the 58 suspended finance companies. Only two of these companies have been allowed to re-open.

The financial crisis plunged the four troubled medium-scale banks into a liquidity crisis, which also reflects their poor asset quality. According to UBS research, 53 per cent of BMB's funding depended on short-term liquidity provided largely by the FIDF, compared to 44 per cent for First Bangkok City Bank, 24 per cent for Siam City Bank, 18 per cent for Bangkok Bank of Commerce. Since they are medium-sized banks, they have taken a large chunk of the government's money.

The next step is what the banking regulators plan to do with these four banks. Instead of closing them down, the regulators have opted to keep their operations ongoing. Bank of Thailand governor Chaiyawat Wibulswasdi has indicated that they might be forced to merge among themselves or pair up for mergers before they try to attract foreign partners.

Analysts have also warned about the danger of liquidating the banks' assets at this juncture, when the Financial Sector Restructuring Authority is already in the process of liquidating the Bt800-Bt900 billion in assets of the 56 suspended finance companies. A finance executive said if the assets were placed in fire sales, it would trigger a collapse in assets prices, which would also have far-reaching implications on the asset quality of remaining financial institutions.

But if the assets are not auctioned off cheaply, there will not be enough buyers to bring liquidity back to the system and prevent it from further collapse. ''This is a fine balance that the authorities will have to keep in mind,'' the finance executive added.

Maire of UBS Securities estimated that if the remaining banks succeed in raising about US$5 billion (around Bt250 billion), the banking system will survive, for the new capital will give the banks enough ammunition to write off eight per cent of bad debts from their loan books and still satisfy the capital adequacy requirements of eight per cent.