The government will establish a Deposit Insurance Agency (DIA) to compensate depositors of ailing commercial banks, but the possibility cannot be ruled out that taxpayers will still have to bear the burden of the damage from these banks.

The government would like to reduce the taxpayers' burden in the long run and guarantee part of depositors' money. The DIA will replace the existing system by which the central-bank rescue fund, the Financial Institutions Development Fund (FIDF), bails out ailing financial institutions with a blanket guarantee of deposits.

However, the establishment of the DIA does not mean that all troubled financial institutions will be shut down and liquidated.

The draft of the Financial Institutions Business Act gives the government the last word on whether to shut down ailing banks.

This means that conflicts of interest may remain involved in policy decision-making.

Moreover, the "too-big-to-fail" concept remains in the hearts of Thai regulators, making sure that large banks get privileges to survive rather than smaller ones.

Chanchai Boonritchaisri, the Bank of Thailand's senior director of the Legal and Litigation Department, said that the draft allowed the Financial Institutions Policy Committee to make the decision whether or not to close down ailing banks before handing them over to the Finance Ministry.

The committee's conclusion to shut down or to keep banks alive still needs the government green light.

"The government's decision

is needed to finalise the committee's opinion, because the government will have to provide financial aid for ailing banks," said Chanchai.

There is no guarantee the government will make an objective decision about troubled banks, especially if a minister or related persons are involved, as bank shareholders and do not want to damage their interests.

The taxpayers inevitably have to participate in the financial assistance as the government injects liquidity to revive these banks.

Certainly, it would be unfair to taxpayers if they had to give financial aid to rich shareholders under a politically biased decision. But government assistance would be more acceptable if it followed the committee's decision, which is expected to be objective with the Kingdom's real benefit as its priority.

Moreover, size does matter for the central bank's supervision under the "too-big-to-fail" concept as it does in other developed countries, including the US, where the taxpayers' benefits are believed to be the top priority. This means that Thai taxpayers cannot avoid maintaining the survival of some banks.

Chanchai said the BOT must carefully consider the impact on the financial system when a large bank is shut down. Generally, closing a small bank does not have a huge impact on the system.

"If we close big banks, the whole system can be adversely affected," he said. "As a result we must find other solutions, but the final decision depends on the government's policy."

When the DIA is functioning officially, a depositor of a closed bank will be fully guaranteed a maximum of Bt1 million. According to the central bank's data, deposits with less than Bt1 million per account represent about 90 per cent of total accounts. The DIA, expected to be an independent agency, will receive Bt1 billion in registered capital from the government and twice-a-year contributions from commercial banks.

Depositors now have to take care of their own interests by carefully selecting the banks where they want to save money. One of their guidelines is the credit rating of each bank, which defines the its contribution to the DIA as well.

Anoma Srisukkasem

The Nation