Experiences of financial distress in Thailand

Tipsuda Sundaravej and Prasarn Trairatvorakul

No 283, Policy Research Working Paper Series from The World Bank

Abstract: Between 1983 and 1984, 15 Thai finance companies went under, and many others were distressed. Authorities were faced with the choice of rescuing the troubled institutions or closing them down. Closing an institution is often less costly, financially, than rescuing it. The risk in closing institutions is that you might set off systemwide panic that hurts both the domestic market and the country's ability to attract foreign funds. Although some companies failed to recover, the measures Thai authorities took succeeded in restoring public confidence. How did the authorities succeed in restoring public confidence? First, in choosing to rehabilitate, the government demonstrated its commitment to preserving financial institutions. Second, changes in the Bank of Thailand Act and the regulations governing commercial banks and finance companies gave the authorities more power to handle problem institutions and prevent further crises. Rehabilitating these institutions appears to have cost no more than closing them down and paying off depositors would have cost. Of course, the rescue option meant using government facilities and personnel. It is also more difficult to prosecute former managers under a rehabilitation scheme than if the institution closes down. The dilemma authorities face is the tradeoff between preserving the financialsystem's well-being and preventing moral hazard.

Keywords: Banks&Banking Reform; Financial Intermediation; National Governance; Economic Theory&Research; Private Participation in Infrastructure (search for similar items in EconPapers)
Date: 1989-12-31
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