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Published on October 1, 2007

Northern Rock (NR) is not a well-known financial institution from an international perspective though Thai Premier League fans will recognise it as a name emblazoned on Newcastle United's team jersey.

NR is in fact no small lender - with outstanding loans of Bt6.5 trillion exclusively to the housing market. It is worth noting though that NR's deposit base is only Bt2 trillion, or only 30 per cent of its loan book. Compare that to Bangkok Bank, which has total loans of just under Bt1 trillion but deposits of Bt1.2 trillion - so that deposits outstrip loans by 20 per cent. This means that while Bangkok Bank (and, indeed, all other Thai banks) is in a position to finance their loans with a relatively stable and cheap deposit base, NR had to rely on the more fickle, and expensive, money markets. This was a business model that worked very well for shareholders when liquidity was plentiful, but once the money markets dried up as a result of the ongoing sub-prime crisis, NR immediately found itself stranded. Once news of this leaked, depositors took fright and, quite rationally, starting forming long queues (the likes of which apparently had not been seen in the UK for over 100 years) to withdraw their money.

The point of interest from here on was the reaction of the regulators. In England, there are three regulators - The Chancellor of the Exchequer (our Finance Ministry), the Bank of England (BoE) and the Financial Services Authority (FSA). The last was split from the BoE 10 years ago and, I suppose, is like our Securities and Exchange Commission, which was split from the Bank of Thailand, though the FSA regulates all financial institutions while the SEC merely looks after securities companies. The initial attitude of the BoE was clear: no intervention, let the market take its course. This tune was quickly changed and, step one, the BoE relented by agreeing to provide liquidity to NR, at a penalty rate and fully collateralised, and then, when the queues grew as panic among depositors set in, the BoE, no doubt under severe political pressure, caved in to guarantee 100 per cent of all deposits at NR. This in spite of the fact that the deposit-guarantee law was quite clear that only 100 per cent of the first £2,000 (Bt136,000) and 90 per cent of the next £33,000 would be covered.

Back to Thailand - the proposed Deposit Guarantee Bill, one of the four financial laws I mentioned earlier, would only guarantee an immediate return of Bt1 million per customer per bank. The NR experience leads us to beg the question as to whether the MoF, which has approved the bill, and the BoT which sponsored it, are certain that if a crisis were to emerge at one or more financial institutions (as happened 10 years ago), that the government would commit to protecting only those covered by the law. While it may be true that 98 per cent of all accounts are valued at Bt1 million or less, it is also true that in value terms, this only accounts for just over 30 per cent of all deposits. In effect, under this new law, 70 per cent of all deposits would be unprotected. This means that if a crisis were to occur, there would be a flight of deposits away from Thai financial institutions thus virtually guaranteeing the collapse of the system.

Indeed, before we even get there, the initiation of the Deposit Guarantee scheme would put immediate pressure on the smaller banks - with large depositors likely to be moving their funds to larger banks which are perceived to be more secure. Moreover, with initial funding of Bt1 billion and contributions from banks estimated to be around Bt25 billion a year, it would be close to 100 years before there would be sufficient funds to cover the amount of deposits guaranteed. Thus if a crisis were to occur in the meantime, there is every chance that there would be a panic even among smaller depositors once they understand that there is insufficient coverage with the Guarantee Fund to cover everyone's savings.

Given these limitations, I simply cannot imagine that the government of the day would be able to stand on the sidelines. I am not sure whether it is even reasonable to expect depositors to do their own due-diligence on the financial conditions of the various financial institutions. Is it not more reasonable that they should expect that the regulators would have done that job for them?

I propose therefore that we face reality: that depositors should remain protected. What needs to be avoided however, is the unfair scenario (as with the NR case) that a bank's liabilities are effectively nationalised, while assets remain in private hands. First right over assets must be transferred to the state when guarantees are exercised. Professional creditors to the banks must understand this upfront, and if this limits the bank's ability to leverage, then so be it.

Korn Chatikavanij

Special to The Nation

Korn Chatikavanij is the deputy secretary-general of the Democrat Party.