The amended Bank of Thailand Act will require financial institutions to increase their contribution to the Financial Institutions Development Fund (FIDF) to up to 1% of their deposit base, a pre-emptive measure for financing future bailouts of troubled banks.
"As the FIDF's debt incurred from rescuing financial institutions during the 1997 financial crisis has not been paid off yet, the 'post-fund' approach will have to be taken in case a future bailout is required," said Somboon Chitphentom, the central bank's assistant governor of the financial institutions policy group.
"With this approach, if some financial institutions are needed to be bailed out in the future [before the FIDF's debt is paid off], the FIDF will have to pay for it first and the [operating] financial institutions will have to increase their contribution to pay to the fund."
The entire contribution, however, will be capped at 1% to prevent too much pressure on financial institutions' business, Mr Somboon said.
Banks are now charged at 0.47% of their deposits, of which 0.46% goes to repay the rescue fund's debt of more than 1 trillion baht and the remaining 0.01% goes to the Deposit Protection Agency.
The FIDF a few years ago estimated that the debt incurred from bailing out troubled financial institutions during the 1997 financial crisis would be repaid in less than 15 years, instead of the 24 years previously scheduled.
Mr Somboon said that in the case of a bailout being needed, the FIDF is allowed to borrow from either the Bank of Thailand or other sources guaranteed by the Finance Ministry.
"The amended law also clears the way for the government to make a contribution to the bailout if needed to solve the crisis," he said.
The central bank is currently amending the Bank of Thailand Act to replace the transitional provision in Section 19 of the Bank of Thailand Act 2008, which lapsed in 2012 and created a loophole in rescuing beleaguered financial institutions in times of crisis.
The amended law will clearly state that financial institutions must be mutually responsible in shouldering costs incurred from bailing out financially ailing peers in the future to prevent an undue burden on the government.
"The leftover financial institutions will have to pay for the bailout, as they are the ones that will benefit after the crisis is resolved," Mr Somboon said.
The amended version of the law will also set a clear decision-making process in times of crisis and authorise the FIDF to provide financial support.
Mr Somboon said the law will shorten the decision-making process in throwing a lifeline to troubled financial institutions, as they will only need approvals from the Financial Institutions Policy Committee and the cabinet, bypassing the FIDF board as required in the transitional provision.
Mr Somboon said the five largest financial institutions classified as domestic systemically important banks (D-SIBs) aren't the only banks that will be bailed out of trouble.
"Financial institutions that get a bailout must be considered as a systematic threat, not only the D-SIBs," he said.
The law is in the process of being submitted for approval by the National Legislative Assembly.
