Recapitalization of Thailand's Banks After the 1997 Crisis: Interpretation and Critique from a Neo-institutional Perspective

Abstract

The recapitalization of Thailand's banks following the 1997 crisis is interpreted and positively criticized from the perspective of neo-institutional theory. Although a recapitalization scheme was introduced as part of monetary policy in 1998, the statistics and critical reaction on the part of private interests suggest that public resources and administrative action would not suffice to fully and expeditiously fulfill this task. To increase the supply of private capital to the banking sector the authorities can most effectively adopt a neo-institutional philosophy, under which policy credibility in situations of financial distress is enhanced by the clarification of property rights and minimization of opportunities for special-interest action. Neo-institutional theory also suggests that it is possible to expedite overall monetary recovery if the government concentrates on its comparative advantage in supplying the public good of financial stability, and leave commercial banks free to realize private comparative advantage in areas such as restructuring, re-engineering, mergers and competition. To link public and private action in the areas noted above, initiatives can be introduced to cooperatively exploit relative efficiency in obtaining and using information to support decision-making.

Keywords:

• Thailand
• 1997 financial crisis
• commercial banks
• recapitalization
• property rights
• neo-institutional policies

Acknowledgements

M.T. Cheung is indebted to Steven N.S. Cheung and Lars Werin for instruction in neo-institutional economics. Z. Liao wishes to thank his student researchers in Nanyang Technological University for assistance in preparing data for this article.