Following years of growth, the Thai economy began showing confidence-busting signs in 1996, including a liquidity crunch. In May 1997, the Bank of Thailand (BOT) announced that it would expand the list of short-term assets that banks and finance companies could use to satisfy the BOT’s liquidity reserve requirement, including obligations of the Financial Institution Development Fund (FIDF), which provided liquidity support to illiquid financial institutions. In the summer of 1997, the BOT suspended the operations of 58 finance companies and floated the Thai baht (THB), unleashing the Asian Financial Crisis (AFC). Tight liquidity conditions continued and, in September 1997, the BOT cut the RR on domestic deposits from 7% to 6%. Thai officials said at the time that the lower RRR would result in an increase of THB 51.6 billion (USD 1.52 billion) in cash held by banks and finance companies. Companies could satisfy this reserve requirement by holding deposits at the BOT or by holding public securities and bonds. The BOT repeatedly expanded the list of eligible reserve assets. In July 1998, the BOT allowed holdings of the debt of banks and finance companies that the government had consolidated to satisify the reserve requirement. The BOT made further changes to the RR in 1998 and 1999, redefining “short-term foreign lending” and lowering the portion of the RR that commercial banks were required to deposit with the BOT. In April 1999, to support Thailand’s economic recovery, the BOT added loans to the Export-Import Bank of Thailand to the list of eligible reserve assets. Contemporaneous observers were skeptical of the BOT’s reserve requirement policy, noting that it was insufficient to reduce liquidity concerns and carried risks.
Vergara et al. (Wed,) studied this question.