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Document Type

Case Study

Case Series

Blanket Guarantees

JEL Codes

G01, G28

Abstract

The Thai government’s decision to allow the baht to float in July 1997 was the pivotal event of the Asian Financial Crisis. The baht fell 20% by the end of the month, further pressuring Thai financial institutions that had borrowed heavily in US dollars and other foreign currencies. In early August, Thailand’s Finance Minister and the Bank of Thailand (BOT) announced the suspension and restructuring of insolvent finance companies and a blanket guarantee covering depositors and creditors of all domestic banks and the remaining finance companies, administered by the BOT’s Financial Institutions Development Fund (FIDF). However, the blanket guarantee was initially unsuccessful in restoring public confidence because of early inconsistencies in messaging and skepticism about the credibility of the guarantee given the extent of financial institutions’ liabilities. Bank runs continued for months after the government announced the guarantee and ended only in November, when the government began to use its new authority to take over insolvent banks and assume their liabilities, rather than closing them and directly paying guaranteed depositors and creditors. No guaranteed depositors or creditors lost money after the government announced the blanket guarantee. The FIDF ultimately lost THB 1.4 trillion (USD 34 billion) in bailing out guaranteed banks and finance companies, THB 554 billion of which specifically went toward the blanket guarantee. In 2003, the FIDF reduced the blanket guarantee’s coverage to include only depositors and no other creditors. The blanket guarantee ended with the enactment of the Deposit Protection Agency Act in 2008, which established a limited deposit insurance scheme that protected deposits up to THB 1 million (USD 32,000).

Date Revised

2022-12-22

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