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Published on October 15, 2007

The credibility of Thai financial authorities, which has not been fully restored since the 1997 crisis, is a key obstacle to financial reform, while effects from the recent the sub-prime mortgage crisis in the US have apparently complicated the issue.

The Finance Ministry and the Bank of Thailand (BOT) have proposed four draft financial bills to the National Legislative Assembly (NLA), in a bid to reform both the central bank and the financial market.

One of these amends the Currency Act. Finance Minister Chalongphob Sussangkarn failed to have the bill debated in its first reading by the NLA. Last week for the second time, he asked the Cabinet to withdraw the draft from the NLA's debate agenda.

Chalongphob stepped back because critics opposing the bill fear that the new law would allow the central bank to make risky investments in the management of official reserves. Luangta Maha Bua, one of Thailand's most revered Buddhist monks, together with his followers expressed concern that the BOT would repeat the same mistakes that resulted in the depletion of official reserves and then the 1997 financial crisis.

Some economists, however, have thrown their support behind the BOT and called for the public to trust the central bank.

Trust or credibility is probably the most valuable asset that all central banks around the world have struggled to obtain. Now we are seeing the US sub-prime crisis having repercussions everywhere, including Thailand, because it puts the credibility of financial regulators, the central bank and the Finance Ministry at high risk.

The sub-prime crisis may be fully addressed by the US government and the rest of the international community, but its impact on global financial markets has not yet been fully assessed.

Thai authorities, suffering credibility damage from 1997, may need to take a lesson from the Bank of England. Recently, the UK media described a bank run on Northern Rock as a humiliation for the Bank of England. Northern Rock made loans to borrowers with a poor credit history, similar to the sub-prime mortgage market in the US.

The Bank of England has been forced to rescue Northern Rock with a full guarantee of depositors' savings.

This action has violated its long-held policy of letting weak banks collapse along with a limited guarantee of savings accounts. The Bank of England previously claimed this policy was to prevent moral hazards in the financial system.

Ironically, the BOT and the Finance Ministry will soon submit a draft bill of the Deposit Insurance Act to the NLA. If it passes into law, the draft would eventually reduce the government's blanket guarantee of deposits to only Bt1 million per savings account per bank. The goal of the bill is to shift the risk of financial burden from taxpayers to depositors and tighten financial discipline on the part of both banks and depositors. The current system of full guarantee incurred a tax bill worth more than Bt1 trillion from the bailing out of financial institutions by the Financial Institutions Development Fund (FIDF), the central bank's rescue arm, during the 1997 crisis.

Taking a lesson from the Bank of England, it is likely the BOT and the next government may do the same if a new financial crisis knocks at the door. Then a limited deposit-insurance scheme would be almost useless.

The NLA recently approved the draft bill of the Financial Institutions Business Act in its first reading, while bankers have complained the bill suffers from too many restrictions.

"It almost prevents bankers from conducting any reasonable financial business," Export-Import Bank of Thailand chairman said Narongchai Akrasanee.

He lamented that the bill reflected the central bank's risk aversion and added that this would not promote economic growth.

Risk aversion in Thai business circles has partly been blamed for the slower recovery of private investment over the past years. Noted economist Ammar Siamwalla even said Thais had learned about risk management too well from the previous crisis, resulting in nobody daring to take risks in business. The lack of a risk-taking spirit may have caused economic growth to be lower than the country's full potential, said Ammar.

Probably the sub-prime crisis - partly caused by innovative financial products known as "collateralised debt obligations" in highly developed financial markets in the US and the UK - have also reinforced risk aversion here.

BOT Deputy Governor Atchana Waiquamdee believes that as a small economy, the Kingdom cannot afford high risks.

Indeed, the central bank in the post-1997 era has taken a cautious approach in taking a supervisory role over financial institutions. Kasikornbank president Prasarn Trairatvorakul has expressed concern about the BOT regulating new financial products too heavily, resulting in lower lending growth and financial innovation being impeded.

In turn, critics who closely watch the central bank and oppose the draft amendment of the Currency Act demand the BOT take a very conservative attitude in managing its own financial assets: official reserves. And BOT Governor Tarisa Watanagase and Deputy Finance Minister Sommai Phasee want greater flexibility in the management of official reserves, in order to facilitate accurate recording of financial gains and losses in the central bank's financial books and the use of BOT resources in reducing the FIDF's financial burden.

Obviously, Chalongphob has been caught in an ironic situation. He is not certain which is the best direction and thus seems to be taking random walks.

Wichit Chaitrong

The Nation