Bangkok Bank of Commerce, Thailand’s 56 Closed Finance Companies, and the FIDF Bailout

More than a year before Thailand was forced to float the baht on July 2, 1997 and ignite the Asian Financial Crisis, the institutional credibility of the Bank of Thailand had already been shattered inside the chambers of the Thai Parliament. On May 9 and May 10, 1996, opposition Democrat Party lawmaker Suthep Thaugsuban rose during a televised no-confidence debate to reveal confidential central bank examination files on the Bangkok Bank of Commerce (BBC), Thailand’s ninth-largest commercial lender. The documents showed that BBC’s management had funneled more than ฿75 billion (roughly $3 billion) in uncollateralized and fraudulent insider loans to cabinet politicians, corporate raiders, and offshore shell companies. ^[1]

Within twenty-four hours of the parliamentary disclosure, panicked depositors pulled ฿30 billion out of Bangkok Bank of Commerce, forcing the Ministry of Finance and the Bank of Thailand’s rescue arm—the Financial Institutions Development Fund (FIDF)—to seize the insolvent lender on May 17, 1996. That early rescue proved to be merely the opening act of a systemic collapse. Over the following two years, as foreign capital fled and Bangkok’s real-estate bubble burst, Thai authorities suspended 58 non-bank finance companies—permanently liquidating 56 of them on December 8, 1997 under the Financial Sector Restructuring Authority (FRA)—and nationalized four commercial banks, including Bangkok Metropolitan Bank and Siam City Bank. By the time the crisis subsided, the FIDF had accumulated ฿1.4 trillion in bailout liabilities—equivalent to more than a third of Thailand’s gross domestic product—creating a sovereign debt overhang that took a quarter-century to service. ^[2]

Offshore Dollar Borrowing and the 1996 Collapse of Bangkok Bank of Commerce#

Thailand’s financial vulnerability in the mid-1990s grew directly out of rapid capital-account liberalization paired with a rigid exchange-rate peg. In March 1993, Thai authorities established the Bangkok International Banking Facility (BIBF) to turn Bangkok into a regional financial center. With the Thai baht pegged closely around 25 baht per US dollar and domestic Thai interest rates running 5 to 7 percentage points higher than U.S. rates, Thailand’s 15 commercial banks and 91 non-bank finance companies (borisat ngoen thun) borrowed tens of billions of short-term US dollars offshore and lent the proceeds domestically into Bangkok office towers, luxury condominiums, golf courses, and stock-market margin accounts. ^[3]

Nowhere was regulatory supervision weaker than at the Bangkok Bank of Commerce. Founded in 1944, BBC had been run since September 1988 by President Krirkkiat Jalichandra—ironically a former head of the Bank of Thailand’s financial analysis unit originally dispatched to clean up the lender—alongside his Indian-born treasury advisor, Rakesh Saxena. Between 1991 and 1995, Krirkkiat and Saxena turned BBC into a personal and political financing engine, extending tens of billions of baht in loans backed by wildly inflated rural land deeds or nonexistent offshore collateral to finance hostile corporate takeovers on the Stock Exchange of Thailand and bankroll prominent politicians in the “Group of 16” faction of Prime Minister Banharn Silpa-archa’s coalition government. ^[4]

Although Bank of Thailand examiners repeatedly flagged BBC’s surging non-performing loans between 1992 and 1995, Governor Vijit Supinit and senior supervisors refrained from removing management or halting insider lending. The cover-up collapsed on May 9, 1996, when opposition MP Suthep Thaugsuban presented leaked central bank inspection reports to Parliament demonstrating that BBC held ฿75 billion in bad and doubtful assets—nearly half of its total ฿180 billion asset base—including ฿24.65 billion lent directly to ruling coalition politicians and their proxies. ^[5]

A catastrophic run began the next morning as customers withdrew ฿30 billion in days. On May 17, 1996, the Finance Ministry ordered the Bank of Thailand’s Financial Institutions Development Fund (FIDF) to take control of BBC and convert billions of baht in emergency liquidity support into equity. The scandal forced Bank of Thailand Governor Vijit Supinit to resign in disgrace in July 1996, sent Rakesh Saxena fleeing to Canada (where he fought extradition for thirteen years until 2009 before receiving a ten-year prison sentence in 2012), and resulted in Krirkkiat Jalichandra receiving sentences totaling seventy years in prison across seven embezzlement convictions before his death in October 2012. Most fatefully, the BBC debacle signaled to international currency markets that Thailand’s banking system was riddled with concealed insolvency. ^[6]

The 1997 Run on Thai Finance Companies and the June–August Suspensions#

As export growth stalled in 1996 and vacancy rates in Bangkok commercial real estate climbed past 20 percent, property developers began defaulting on loans owed to Thailand’s 91 non-bank finance and securities companies. Unlike commercial banks, Thai finance companies were legally barred from taking retail checking or savings deposits; instead, they funded long-term property and hire-purchase loans by issuing high-yield short-term promissory notes to corporations and wealthy households and borrowing short-term dollars through BIBF credit lines. ^[7]

In February 1997, Somprasong Land defaulted on a Eurobond interest payment, and rumors engulfed Finance One—Thailand’s largest finance company, headed by Pin Chakkaphak, with over ฿100 billion in assets. As institutional note-holders refused to roll over maturing promissory notes and foreign banks cut short-term dollar lines, the Bank of Thailand’s FIDF quietly stepped in as lender of last resort. Between March and July 1997, without public disclosure, the FIDF pumped more than ฿400 billion (roughly $16 billion at the pre-float peg) in emergency liquidity loans into cash-strapped finance companies while simultaneously committing $23.4 billion in forward currency swaps to defend the baht against hedge-fund attacks.

By late June 1997, both the FIDF’s liquidity lifeline and the Bank of Thailand’s usable foreign reserves were exhausted. On June 27, 1997, the Ministry of Finance and the Bank of Thailand ordered the immediate 30-day suspension of 16 deeply insolvent finance companies—including Finance One—directing them to submit capital rehabilitation plans or merge with stronger institutions. Five days later, on July 2, 1997, with net foreign reserves depleted, Thailand abandoned the dollar peg and floated the baht, which plummeted from 25 baht per dollar toward 56 baht per dollar by January 1998, instantly doubling the local-currency burden of every unhedged dollar loan on Thai balance sheets.

Rather than restoring calm, the June suspension of 16 finance companies convinced note-holders that the remaining 75 finance companies were next. To satisfy prior actions for a $17.2 billion international rescue package led by the International Monetary Fund (IMF), Thai authorities announced on August 5, 1997 the suspension of 42 more troubled finance companies—bringing the total number of frozen institutions to 58 out of Thailand’s 91 finance companies. To stop the panic from spreading to the 33 surviving finance companies and the 15 commercial banks, the government simultaneously issued a sweeping blanket guarantee backed by the FIDF promising full repayment in baht to all depositors and bona fide creditors of operating institutions.

The Financial Sector Restructuring Authority (FRA) and “FIN 56”#

To prevent political interference from resuscitating zombie institutions—as had happened with Bangkok Bank of Commerce—the Chavalit Yongchaiyudh and incoming Chuan Leekpai administrations enacted six emergency royal decrees on October 24, 1997. These decrees established two independent resolution bodies: the Financial Sector Restructuring Authority (FRA), charged with independently reviewing the rehabilitation blueprints of all 58 suspended finance companies and liquidating the assets of those rejected; and the state-owned Asset Management Corporation (AMC), capitalized by the Ministry of Finance to act as a bidder of last resort for lowest-quality distressed assets so fire-sale auctions would not collapse Thai property values entirely.

Strict capitalization and foreign-partner criteria left almost none of the suspended lenders viable. On December 8, 1997, the FRA and Finance Minister Tarrin Nimmanahaeminda announced the permanent closure and liquidation of 56 of the 58 suspended finance companies (universally referred to in financial markets as FIN 56). Only two suspended institutions—Kiatnakin Finance and Securities and Bangkok Investment Public Company—satisfied the stringent recapitalization requirements to reopen.

The closure of the 56 finance companies eliminated roughly 12 percent of total Thai financial system assets overnight and displaced more than 20,000 financial-sector employees. Taking possession of approximately ฿860 billion in book-value assets (including ฿600 billion in core commercial real estate, corporate, auto hire-purchase, and residential mortgage loans across hundreds of thousands of borrowers), the FRA organized a series of international public auctions between February 1998 and late 1999. Overall, the FRA recovered roughly ฿250 billion to ฿275 billion—an average recovery rate of about 25 to 28 percent of book value—with private investment funds and the state-owned AMC absorbing the bulk of the non-performing portfolios.

1998 Commercial Bank Nationalizations and the ฿1.4 Trillion FIDF Debt#

Even after excising the 56 finance companies, the deepening economic contraction—which shrank Thailand’s real GDP by 10.5 percent in 1998—pushed non-performing loans past 45 percent of total credit across the commercial banking system. When several medium-sized family-controlled commercial banks failed to raise private equity under tightened loan-loss provisioning rules in early 1998, the Bank of Thailand and the FIDF moved swiftly to nationalize them.

Between January and February 1998, the Bank of Thailand ordered extreme capital write-downs—slashing the par value of existing shareholders’ stock from ฿10 per share to just 1 satang (฿0.01) to wipe out the founding families—and used the FIDF to nationalize four insolvent commercial banks: Bangkok Metropolitan Bank (BMB) (controlled by the Tejapaibul family), Siam City Bank (SCIB), First Bangkok City Bank (FBCB), and the already-seized Bangkok Bank of Commerce (BBC). Six months later, under the landmark August 14, 1998 comprehensive financial restructuring package, the government intervened in two additional commercial banks (Laem Thong Bank and Union Bank of Bangkok) and five more finance companies, transferring BBC’s few performing assets and First Bangkok City Bank into state-owned Krung Thai Bank while winding down BBC’s remaining shell.

The entire weight of this systemic rescue landed on the balance sheet of the Financial Institutions Development Fund (FIDF). Established by emergency decree in November 1985 as a separate legal entity within the Bank of Thailand designed to collect modest deposit-insurance assessments and assist occasional troubled lenders, the FIDF had instead served as an off-budget fiscal conduit for rescuing BBC, advancing more than ฿1 trillion in liquidity loans to the 56 shuttered finance companies and nationalized banks, and honoring the August 1997 blanket guarantee.

In total, the FIDF incurred gross crisis obligations and bailout losses of approximately ฿1.4 trillion (roughly $34 billion to $36 billion, or 32 to 40 percent of Thailand’s GDP). Because the FIDF had initially financed its rescues by borrowing overnight in the repurchase market and drawing advances from the Bank of Thailand, the Thai government was forced to fiscalize the losses through multiple waves of sovereign bond issuances—beginning with ฿500 billion in FIDF-1 bonds in May 1998 and followed by ฿780 billion in FIDF-3 bonds in 2002. In January 2012, the Thai cabinet transferred the remaining ฿1.14 trillion in FIDF bond principal and interest servicing responsibility back onto the Bank of Thailand’s FIDF account funded by a 0.46 percent annual levy on commercial bank deposits—ensuring that the financial scars of the 1996 Bangkok Bank of Commerce fraud and the 1997 collapse of the 56 finance companies remained embedded in Thai banking well into the 2020s.

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