Thailand: Financial Institutions Development Fund Liquidity Support

International investors launched three speculative attacks on the Thai baht in 1996 and 1997 following one high-profile banking failure, constant departures from the Bank of Thailand (BOT), and slumping returns on stocks and real estate. Though the BOT succeeded in the baht’s defense, the BOT’s depleted reserves were unable to fend off domestic troubles that emerged in early 1997. The speculative attacks increased the cost of foreign-denominated debt—which accounted for 18% of all bank lending—and forced up interbank lending yields. The decade-long boom in foreign capital inflows had generally overvalued assets, and banks found themselves in need of outside financing to meet short-term obligations. The Financial Institutions Development Fund (FIDF), created in 1985 by the BOT to support troubled institutions, quietly provided more than THB 400 billion (USD 17 billion) to nonbank finance companies between March 1997 and July 1997. Ultimately, this support did not contain the problem, and by August the BOT had temporarily suspended 58 finance companies. Crisis support ended in January 1998, after the BOT permanently closed 56 of the 58 suspended finance companies and converted FIDF loans to four commercial banks into equity. The liquidity support to finance companies peaked at more than THB 434 billion outstanding in August 1997. The FIDF lost at least THB 244 billion from the liquidity support to finance companies and an unknown amount from the support of commercial banks. That burden, about 15% of GDP, ultimately fell to the BOT and FIDF, which expects to repay FIDF bonds by 2030.