What happened to Thai commercial banks in the pre-Asian crisis period: Microeconomic analysis of Thai banking industry

In this paper, it is discussed from the microeconomic perspective how the production activities of Thai domestic commercial banks changed under the progress of the financial liberalization policy during the 1985-1994 period. First, using the microeconomic data on Thai domestic banks, we sketch their major business activities. Next, we formally estimate the cost functions of Thai domestic banks and demonstrate that financial liberalization policies promoting market competition helped create more efficient business operations of banks. Our estimation study also suggests that the the medium-sized banks, which were the first to fail during the economic crisis in 1997, were deeply involved in unsound business operations and engaged in excessive lending and that appropriate prudential regulations are essential for improving production efficiency while maintaining the sound business operations of banks.