Transitioning from Dysfunctional to Normal Banking System after the 1997 Crisis: Thailand Policy Considerations
61 Pages Posted: 19 Dec 2001 Last revised: 15 Feb 2009
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Transitioning from Dysfunctional to Normal Banking System after the 1997 Crisis: Thailand Policy Considerations
Date Written: July 12, 2001
Abstract
Transitioning from dysfunctional to normal banking system after the Thailand 1997 crisis is fundamentally a dynamic, trust building, process-oriented management problem. It is not a static goal oriented process with close-end solution because of multi-dimensions and dynamic complexity nature of the problem. The critical factor for success is to have adequate understanding and prudent addressing of all the stakeholders' interests - foreign and domestic, private and government, borrowers and lenders. It is very important that banks should be restored to its normal function as 'bridge of trusts' for fund users and fund providers to nurture a recreation of innovative SME entrepreneurs. The objective is to stimulate new value added private investment for sustainable growth and wealth creation. To mitigate the principle and agent problems in this process, one must dynamically understand, monitor and administer the management process well. Good theoretical knowledge and practical experience on banking operations in incomplete and imperfect market are also required. The proposal for transitional process in stages on Schumpeterian ground is designed to facilitate environment for identifying and creating incentive compatibility with risks and rewards sharing among stakeholders in cooporative competition setting. Government as a principle first endows all agents with trust capital in the form of limited, but contestable, banking competition, partial credit guarantee scheme and demand side intervention in value added business activites. All agents would have strong incentives to compete with one another in repeated game-like transactions to build information capital and reputation capital over time. The agency problems are alleviated by reputation building, efficient truth telling, self-sorting tournaments game with third party monitoring. The main focus is to jump start the economy through the fostering of new SMEs by providing partial credit guarantee with limited time, market based incentives and other related measures.
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