Reforming the traditional structure of a central bank to cope with the Asian financial crisis: Lessons from the Bank of Thailand

17. Reforming the traditional structure of a central bank to cope with the Asian financial crisis: lessons from the Bank of Thailand Andrew W. Mullineux, Victor Murinde and Adisorn Pinijkulviwat* 1 INTRODUCTION The Bank of Thailand (BoT) became Thailand’s central bank on 10 December 1942, and like all traditional central banks was entrusted with a broad range of traditional functions: to issue currency; to safeguard the value of money; to promote monetary stability and a sound financial structure; to promote economic growth; to act as the bankers’ bank and provide lender-of-last-resort facilities; and to act as banker and financial adviser to the government.1 During most of its history, the BoT played an important role in promoting the development of financial institutions and markets in Thailand. However, following the Asian financial crisis which broke out in 1997, the BoT became vulnerable as Thailand started to experience a severe economic crisis. The crisis derailed all ongoing financial reforms and directly crippled the banking sector, the stock exchange and the foreign exchange market (McKinnon and Pill, 1998). Regarding the banking sector, the major problems associated with the crisis included: failure of financial institutions; insufficient bank liquidity and inadequate capital; high non-performing loans; and loss of momentum in rebuilding confidence among international investors, depositors and economic development organizations, potentially limiting future capital flows into Thailand. In this context, it is interesting to examine how a traditional central bank, like the BoT, is able to cope with a financial crisis of a magnitude….