Question 1: Who was the main owner of BBC? Does this contribute more to principal-principal problems or more to principal-agent problem?1. BBC belonged to aristocratic families of Thailand.
And they, instead of hiring a professional manager to run the bank, selected someone in them to operate it. As there was no effective and proper regulation and supervision to constrain misbehaviors of the management and major stockholders, they made unreasonable loans to relatives, friends, politicians in exchange for love, respect, money and power. However, such loans were considered to be risky loans.
2. Since BBC was run by aristocratic families, principal-principal problems were caused.
When the executives of the bank made risky related lending to unqualified borrowers who had greater chance than expected to default the loans for their own benefits, benefits of stockholders were hurt. And in economics, this is called principal-agent problem, namely, the management who controls the company might cause loss to stockholders for their own benefit.
When major stockholders made loans to their relatives, their own companies and politicians without surveying as routine whether they were able to repay it, minor stockholders’ interests were hurt as well. And this is called principal-principal problem. That is, when major stockholders are able to intervene the operations of a company, minor stockholders’ interests might be harmed because major ones possibly do so for their own benefits. For example, a major stockholder of a beer producer who owns a grain firm might set a price for grains purchased at his own firm, which are raw materials of beer.
In this case, the fact that BBC was owned by aristocratic families led more to principal-principal problem for the following reasons. Firstly, the management itself was the owner, and it represented interests of stockholders to some degree. Secondly, major stockholders had great power to choose the management and minor stockholders’ advice was not important because of poor supervision, major stockholders had more voice in corporate operations.
Question 2: What type of the problem did BBC experience?In 1996, BBC was found, as is mentioned in the first paragraph, to have a great amount of nonperforming loans and a large number of bad and doubtful debts. With the nonperforming loans and uncollectible debts, BBC was not able to pay depositors’ money back. And it was faced with the problem of insolvency.
Question 3: Who bore the costs of BBC’s mismanagement?Taxpayers paid the price at the end.
As a result of its insolvency, Finance Ministry took over BBC and appointed a five-member committee to run the bank (Sherer, 1996). Besides, a bailout plan was proposed, and central bank was expected to fund its bad loans to just to avoid crowding out and more severe consequences. With the bailout plan of the government, it was actually the taxpayers that paid the price at the end. Considering that financial recession later in Southeast Asia was caused partly because of it, the country and the taxpayers paid much more than the bailout.
ReferenceSherer, P. (1996). Thailand Official Details Loans of Bangkok Bank of Commerce. Retrieved 4 February 2020, from .