The Bank of Thailand (BOT) will next month issue directives that empower it to force commercial banks to raise capital or revamp their boards of directors. Under the measures, the central bank could force banks to raise capital when their capital-adequacy ratio (CAR) is lower than 9.5 per cent of risk-weighted assets. It could also instruct those banks to slow down extending risky loans or paying dividends, said BOT Assistant Governor Krirk Vanikkul.

The BOT will soon set a minimum CAR to replace the current across-the-board requirement of 8.5 per cent, which was adopted after the financial meltdown in 1997.

Krirk said the central bank would also adopt "Prompt Corrective Action", which authorises it to step in and remove top executives of banks with capital below 60 per cent of the requirement.

In the worst cases, the central bank will have a mandate to shut down banks with capital below 35 per cent of the required level, he added. These banks could be exempted from the regulation with Finance Ministry approval.

Earlier, Chanchai Boonritchaisri, senior director of the BOT's Legal and Litigation Department, said the Financial Institutions Business Act would allow the Financial Institutions Policy Committee to make a recommendation about whether to shut down ailing banks, with the Finance Ministry making the final decision.

The concept of "too big a bank to fail" is expected to remain at the heart of helping ailing banks' solve their problems.

"The banking industry's CAR averages 14 per cent, and banks with a CAR below 9.5 per cent must be closely monitored. Banks have so far realised the importance of a strong financial position by having a CAR greater than the minimum requirement of the central bank," he said.

The full details of the new minimum CAR requirement and Prompt Corrective Action will be announced later.

In cases where financially ailing banks must be shut down, the Deposit Insurance Agency (DIA) - to be established soon - will take responsibility for their depositors.

After the DIA's formation, commercial banks will have to switch their contribution from the Financial Institutions Development Fund to the new entity. Banks now contribute 0.4 per cent of deposits and lending to the rescue fund.

Krirk said such measures could be implemented ahead of the Financial Institutions Business Act, which will be forwarded to the National Legislative Assembly after it received Cabinet approval late last month.

Finance Ministry officials are strongly against granting power under the act to the central bank in dealing with financially troubled banks, because they believe the ministry would inevitably be linked to any actions taken by the BOT to tackle the ensuing fiscal and budgetary burdens.

Anoma Srisukkasem

The Nation