IMF Factsheet
January 1998

Equity holders and owners of other publicly traded instruments have suffered losses. In U.S. dollar terms, as of December 17, 1997:

Korea's stock market had declined 67 percent since August 11;

Indonesia's stock market had declined 75 percent since July 30; and

Thailand's stock market had declined 63 percent since July 29.

There are no provisions in IMF-supported programs for public sector guarantees, subsidies or support for nonfinancial institutions that are facing financial difficulties and may be forced into bankruptcy. When financial sectors are restructured, shareholders and, as far as possible, also creditors of insolvent institutions should bear the losses they would have sustained in the context of liquidations under bankruptcy procedures. Under the programs:

no liquidity support is to be given to insolvent institutions;

no special treatment is provided for shareholders of institutions that have lost their capital--any payments they receive will be in strict conformity with applicable laws; and

in cases where national authorities had granted guarantees to certain categories of depositors or creditors prior to entering into policy negotiations with the IMF, the authorities must ensure that any likely recourse to official support can be met while still achieving a sustainable fiscal position in the medium term.

Liquidity support may be provided to financial institutions that are undercapitalized but solvent. However, under the programs:

such support is conditional upon the institutions being recapitalized and undertaking incisive restructuring programs to restore them to full financial health;

whenever public resources are used to support the restructuring of institutions whose operations have been suspended or placed under conservatorship, previous owners should be removed (through writing down their equity) and management replaced; and

the potential cost of liquidity support to the public purse should be minimized through measures that (a) improve the institutions' financial health (and thereby their capacity to repay liquidity support) and (b) strengthen the economy so that creditors have much less reason to wish to unwind their exposures.

• The operations of 14 of 30 merchant banks have been suspended (the operations of 9 were suspended at the start of the program). Those that fail to be recapitalized within set time scales, and fail to satisfy the authorities as to their future viability, will be closed.

• All other merchant banks are required to submit rehabilitation plans which are to specify measures to strengthen capitalization, liquidity, management and operation. If the plans are unacceptable or fail to be implemented, the institutions will be closed.

• Two commercial banks in distress will also be required to recapitalize and restructure, e.g., by merger with an existing domestic or foreign institution, according to a strict timetable. Failure to satisfy the authorities' criteria will result in closure. Meanwhile the government has taken voting control by providing temporary capital support against the additional condition that the banks substantially reduce their cost base.

• The government has fully guaranteed all deposit and deposit-like claims of domestic resident creditors. The scheme will be fully funded by the government but will be replaced by a scheme limited to small depositors and financed by covered institutions in 2000.

• The government has financed the acquisition by the Korean Asset Management Corporation of impaired assets, from institutions submitting rehabilitation plans, at prices reflecting their realizable value.

• In cases where institutions are closed, payments will only be made to insured creditors. Losses will be born by shareholders and uninsured creditors.

• The Bank of Korea's liquidity is provided only against collateral in the form of government and government guaranteed securities.

• 16 insolvent banks have been closed. Shareholders of the closed banks have had their capital written down and shareholder losses will not be compensated. The government will not guarantee repayment of the liabilities of closed banks except for small depositors who will be compensated promptly (within two weeks after bank closure) for up to Rp20 million per depositor per bank. Payments to depositors will be administered by Bank Indonesia and funded by the government. Other claims will be settled from the proceeds of asset sales.

• Weak, but viable, banks have been required to formulate and implement rehabilitation plans. If an individual bank's plan is not acceptable to the central bank, the bank will be closed and placed under receivership.

• Bank Indonesia will streamline its lender of last resort function. Loans to illiquid but solvent banks will be provided in accordance with stringent access conditions. These loans will be collateralized and extended to individual institutions at increasingly punitive interest rates. Any emergency assistance to banks to prevent systemic risks will be explicitly guaranteed by the government.

• At a later date, the government will introduce an explicit, limited, and self-funded, deposit insurance scheme.

• Extensive action will be taken to deal with state and regional development banks. State banks will be downsized and gradually privatized, while their operations are streamlined and subject to international auditing; also, the authorities and the individual banks will agree on performance contracts and their recapitalization only will take place in conjunction with privatization. Regional development banks with potential major losses will be placed under conservatorship, and will be rehabilitated by requiring the shareholders (i.e., the regional government) to provide cash injections; if unable to obtain additional capital within one year, the bank will be closed.

• In the case of private nonfinancial corporations, the government will not guarantee any of their liabilities.

58 finance companies--16 initially and 42 subsequently (from a total of 91)--were suspended. 56 of these companies will be liquidated; the remaining two companies will be allowed to reopen in adherence with strict rehabilitation plans, subject to being recapitalized within 90 days. There will be no contribution by the Financial Institution Development Fund (FIDF) toward recapitalization. FIDF (the lender of last resort) lending rates to viable financial institutions have been raised above the highest deposit rates in the system and all liquidity support will be subject to conditionality.

Shareholders

• Shareholders' equity and subordinated debt in unviable finance companies will be written down in the first instance to cover losses.

Depositors

• In the original 16 suspended finance companies, claims will be restructured in the form of nonnegotiable instruments, with 6-60 month maturities depending on the size of the claim, and carrying market interest rates;

• In the other suspended finance companies, the instruments will be on similar, but negotiable, terms.

• In all remaining finance companies and domestic banks, depositors' claims will be honored promptly in cash (in baht) through the FIDF.

Creditors

• In the first group of 16 suspended finance companies, claims will be honored in accordance with liquidation procedures;

• In the second group of suspended companies, claims can be restructured in the form of negotiable instruments similar to the arrangement for depositors (but with an interest rate of 2 percent per year, i.e., substantially below market rates), or claims can be renegotiated or honored in accordance with liquidation procedures; and

• In all remaining finance companies and domestic banks, creditors' claims will be honored promptly in cash (in baht) through the FIDF.

All viable financial institutions are required to strengthen their capital after new strict loan classification and provisioning rules have been applied, while all unviable institutions will be subjected to central bank intervention, their management changed, and shareholders' equity written off. Once the financial system is on a sound footing, the broad guarantees offered to open institutions will be replaced with a self-financed deposit insurance scheme, with limited coverage of deposits.

International Monetary Fund

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