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Dealing With Systemic Crisis

Dealing With Systemic Crisis. by Tarisa Watanagase Deputy Governor, Bank of Thailand. Third Annual International Seminar on Critical Issues in Financial Stability Washington, D.C., U.S.A. 6 June 03. Presentation Outline. Causes Evolution and Impact of the Dual Systemic Crisis

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Dealing With Systemic Crisis

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  1. Dealing With Systemic Crisis by Tarisa Watanagase Deputy Governor, Bank of Thailand Third Annual International Seminar on Critical Issues in Financial Stability Washington, D.C., U.S.A. 6 June 03

  2. Presentation Outline • Causes • Evolution and Impact of the Dual Systemic Crisis • Crisis Management • Lessons Learnt • Current Conditions • On-going Efforts

  3. A. Causes

  4. a. Main causes of the crisis • Loss of competitiveness, fixed exchange rate regime, and FX intervention policy • Financial institution governance and supervision • Contagion Effect

  5. b. Factors which magnified problems • Policy-making process and administration: Lack of timely decision making • Structure of economy and financial system

  6. Evolution and Impact of the Dual Systemic Crisis

  7. i. Prior to float of Baht • Export slowed, investors confidence declined, stock market declined, asset price declined • Capital outflows, decline in international reserves • Bank of Thailand required problem financial institutions to submit resolution plan and capital increase • Names of problem institutions spread, cost of borrowing increased, liquidity crisis, liquidity injection, insolvency • Liquidity injection increased supply of Baht and exacerbated pressure on currency • Suspension of 16 finance companies in June 1997

  8. ii. After float of Baht in July 1997 • Exchange rate volatility • Liquidity problem increased • Comprehensive Policy Package (IMF Package): Tightened macro policy and strengthened financial institutions to signal policy credibility • Increased vulnerability: Foreign currency debt/GDP rose significantly due to depreciation and GDP contraction.

  9. ii. After float of Baht in July 1997(continued) • Credit risk and default of borrowers with FX exposure increased. • Increased loan defaults, high NPL, strategic NPL • Increase in provisioning, lower profit/ increased loss, which result in inadequate capital. • The massive depreciation compounded the problem as increase in interest rate led to liquidity and eventual insolvency problems at more financial institutions • Additional 42 finance companies were suspended

  10. C. Crisis Management

  11. a. Government Role i. Immediate measures to resolve the crisis • Closure of 56 finance companies • Issuance of blanket guarantee in order to restore depositors’ confidence • Financial institutions recapitalisation (both by private means and governments’ support schemes) • Financial institutions intervention, merger, and privatization

  12. Government Role (continued) • Financial institutions intervention, merger, and privatization (continued) • Lessons learnt : keeping intervened banks open would provide continuation of services to customers and hence preventing deterioration of assets.

  13. Government Role (continued) • Financial institutions intervention, merger, and privatization (continued) • Objectives of resolution strategies: • Be cost-efficient • Facilitate consolidation of the banking sector • Ensure credibility and transparency • Enhance confidence in the banking system • Ensure consistency with the capital support facilities

  14. Government Role (continued) • Financial institutions intervention, merger, and privatization (continued) • Measures: • Write down capital to ensure that the losses were borne by the shareholders • FIDF inject new capital into the financial institutions and appoint a new management team. • Invitation for Thai and foreign strategic investors to invest in the banks.

  15. Government Role (continued) • Measures to strengthen financial institutions system and increase confidence • Prudential Measures • improve asset qualities of financial institutions • Improve supervisory capacity (risk-based supervision) • Good governance and disclosure • Legal framework review

  16. Government Role (continued) • Measures to strengthen financial institutions system and increase confidence (continued) • NPL Resolutions • Establishment of organizations to facilitate the financial sector reform and debt restructuring

  17. b. Industry Role • Business reform • increase non-interest income • cost reductions • Enhance competitiveness • expansion of operating hours • open sub-branches in locations with high potential • adopting new business model • introduce new delivery channels

  18. b. Industry Role (continued) • Management reform • Good governance • Reorganization • Staff development • Improve internal audit standard • Implement effective tools and system for risk management

  19. c. Cost of the Financial Crisis • Total cost 1.4 trillion Baht = About 25% of GDP (Gross basis, recovery not yet deducted) • All costs fiscalised by law • 800 billion Baht worth of government bonds issued. • The remaining 600 billion Baht to be issued when obligations fall due.

  20. D. Lessons Learnt • Early warning system, prompt corrective actions, crisis management system are critical. b. Magnitude of the crisis was too big and too complex for traditional tools.

  21. D. Lessons Learnt c. Shutting down large number of FIs without separation of viable borrowers and safety-net for them could lead to wider corporate failure which adds another dimension to the systemic risk, prolonging economic contraction. d. Corporate governance is necessary. e. Prudential regulations/supervision need regular benchmarking and improvement.

  22. E. Current Conditions • Macroeconomic performance • GDP growth at a more solid pace, 6.3% @Q1-03 • Internal Stability: in 2002 inflation averaged at 0.7 percent with core inflation at 0.4 percent • External Stability continued to improve. • The balance of payments has been in surplus • International reserves reached 38.9 billion USD at the end of 2002. • External debt at 59 billion, half of peak

  23. E. Current Conditions (continued) ii. Financial institutions stability • Profitability of financial institutions has improved remarkably in 2002. • NPL has been decreased due to transfer of distressed assets to TAMC, debt restructuring, financial reform, and write-off.

  24. E. Current Conditions (continued) ii. Financial institutions stability (continued) • Loan loss provisioning of the majority of financial institutions are higher than official requirement. • Capital was increased significantly; currently every institution maintains higher BIS Ratio than the minimum requirement.

  25. F. On-going Efforts • Improvement of early warning system, institutional arrangement and procedures for problem resolution,risk management system and contingency plan at the Bank of Thailand. • Market-oriented risk-based prudential regulations. • Increased transparency and good governance of policy-making process

  26. F. On-going Efforts (continued) • Redress structural weaknesses in the financial system • Financial Sector Master Plan • Preparation for BIS New Accord. • SEC is drafting master plan for capital market developments which should expand both bond and equity markets. • Legal reforms: DIA, New Financial Institution Business Act, Financial Derivatives Act, Amendment of Bankruptcy and Foreclosure Law

  27. www.bot.or.th

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