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'Central bank's role vital'

Lessons learnt from the 1997 financial crisis in Thailand and the 2008 crisis in the US will not stop Thai bankers from being excessively greedy and prevent another systemic collapse from happening, veteran banker Banthoon Lamsam said recently.

He is concerned about the direction and health of the Thai financial system, as financial institutions are forced to take risks to outperform others. It is only the central bank, torn between the dual objectives of boosting the economy and striking a balance for stability, that can put the brakes on excessive moves and avert another disaster.

"The truth is nobody is truly excellent," he said. Recalling the pre-1997 period, he admitted that he was also pulled into the game of lending, even to risky businesses.

"I had to follow them or I would underperform. Even the board pushed me to take risks, which others took. In the end, banks with excessive greed collapsed and others with less greed were near collapse." People have short memories for mistakes and worse, the industry has welcomed new players. Huge money has drawn new talents, who are driven by greed and become overconfident that they have better approaches than their predecessors to handle risks.

"Another crisis is foreseeable, and it's the central bank that has the right knowledge and conscience to strike a balance," he said.

Banthoon repeatedly warned against excessive loan growth, which has run in the double digits over the past few years. The tougher economic outlook would only force banks to take more risks, particularly in the area of lending to small and medium-sized enterprises (SMEs), which promises a wide interest spread but comes with greater risks than lending to large corporations.

The banking industry is the security of the country, being the main vehicle to boost the economy. However, excessive growth would destabilise the economy.

Banks are a victim of the "hypocritical" capital market. Investors look for stocks with good fundamentals, but the desire to report good profits every three months encourages bankers to take greater risks. There is no such thing as a stock with high profit but no risk.

"Everyone knows the results, but they are pulled by others when in the war. A conservative policy will yield a result in five years, but you can be expelled in three months if the financial results are not impressive," he said.

And this is a universal phenomenon. When trouble strikes, no one is able to perfectly handle risks, as seen in the US when the collapse of a bank sparked a crisis.

While it is the central bank that applies controls for the sake of stability, it can also be attacked if its fails to stimulate growth. At times, it must weigh new rules and judge when to raise the interest rate. The result of a rate cut would be known only a year later. The results of poor rules would be known years later, like in the case of the US. Former Federal Reserve chairman Alan Greenspan went from being revered to drawing harsh criticism for the financial crisis.

Thai banks were spared over their thin knowledge of complex derivatives. Lessons from the 1997 financial crisis also forced the Bank of Thailand to say "no" to complex securities. A key lending rule bars banks from lending excessively to a single borrower.

The arrival of foreign banks' subsidiaries would not change the competition landscape, and the competition should come under control or players would resort to bad practices.

"Banks cannot be allowed to operate without control. I do hope that the BOT is full of conscience and courage, even under huge political pressure," he said.

There are many politicians who prefer relaxed rules to promote growth.

Nobody knows where the balance is but everyone will know something is wrong when a crisis breaks out. There were questions of how reckless banks were before 1997, but the sceptics were not in the situation and they would never know the forces that bankers face.

He praised the overall policy now and the unswerving direction of the Bank of Thailand, which has won deep trust. Some stock analysts were spooked when the central bank told banks to take bigger loan-loss provisions, but they never know how high reserves should go. A sudden crisis in one country could set off a chain reaction that could wipe out Thailand's reserves.

Concerns are now on the change of the central bank governor, as Prasarn Trairatvorakul will complete his term. Much will depend on the new governor's background and mentality.

"Bank presidents and BOT governors are pulled in diverging directions. They must have a conscience," he said.

Tomorrow: Banthoon looks to retirement.


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