FINANCIAL STABILITY AND FINANCIAL SECTOR SUPERVISION:

LESSONS FROM THE PAST DECADE AND WAY FORWARD

DECEMBER 17, 2007
TOKYO, JAPAN

THAILAND’S EXPERIENCE OF BANKING AND

FINANCIAL SECTOR REFORM AFTER THE CRISIS

MR. KRIRK VANIKKUL

BANK OF THAILAND

Paper presented at the Conference: FINANCIAL STABILITY AND FINANCIAL SECTOR SUPERVISION:
LESSONS FROM THE PAST DECADE AND WAY FORWARD
Organized by IMF Regional Office for Asia and the Pacific (OAP),
Keio University-21 Century COE-Market Quality Project and
The Financial Research and Training Center (FRTC) of Japan’s Financial Services Agency (FSA)
December 17, 2007
Tokyo, Japan

The views expressed in this paper are those of the author(s) only, and the presence of them, or of links to them, on the IMF website
does not imply that the IMF, its Executive Board, or its management endorses or shares the views expressed in the paper.
 Thailand’s Experience of Banking and
Financial Sector Reform after the Crisis
Assistant Governor, Mr. Krirk Vanikkul
Bank of Thailand
17 December 2007
 2

Outline
I. Overview of banking system from crisis up to now (1997 – 2007)
II. Regulatory & Supervisory reforms (1997 – 2007)
Stage 1 : cleaning up balance sheet and regulatory changes (1997 – 2001)
Stage 2 : starting to making profit (2001 – 2007)
- moving to risk-based management & supervision
- consolidated supervision
- migration into more consumer lending and more focus on
consumer protection
- IAS 39
III. Retrenching the system and preparation for the future (2004 – 2007)
- FSMP 1 (2004 – Beginning of 2007) : catalyst for merger & acquisition
- FSAP (the end of 2004 - 2007) : mapping our system to the
international standards
- FSMP 2 (2008) : how to go forward
- New FI Laws (FIBA, DIA, and BOT Act) : legal recognition of past
developments and for future changes
- BASEL II : go with the flow in the EMEAP groups
 3

I. Overview of banking system from crisis

up to now (1997 – 2007)
 4

Overview of Banking system

Bil. Bht.
Profit & Loss % of avg. net
total assets Profitability
200 6. 0

100 4. 0 Net Interest Margin 3.2

2.9
0 2. 0 2.0 3.1 2.0
operating profit 1.3 1.5
-100 0. 0
0.6
-0.5
-200 Operating profit -2 . 0

-300 net profit ROA

-4 . 0

-400 -6 . 0
95 96 97 98 99 00 01 02 03 04 05 06 Q1 Q2 Q3 95 96 97 98 99 00 01 02 03 04 05 06 Q1 Q2 Q3
07 07
Bil.Bht NPLs of Banking System % % Capital Adequacy Ratio (CAR)
2,500 42.9 50 16
Full Branch
2,000 38.6 Registered in Thailand 40 14 CAR
15 .1
% Net NPLs / Total Loans 12
1,500 30
% Gross NPLs / Total Loans Tier 1 12.5
10
1,000 17.7 15.7 20
12.9 8 Minimum Requirement for CAR = 8.5
10.5 10.9
8.3 7.5 7.5 7.8 7.9
500 10
6
4.1 4.2 4.4 4.4
0 0 4
98 99 00 01 02 03 04 05 06 Q1 Q2 Q3 97 98 99 00 01 02 03 04 05 06 Q1 Q2 Q3
07 07
 ROA of Banking System 5

Drop in 2006 owing to introduction of IAS 39

Country 02 03 04 05 06 07
(March)
ASIA Indonesia 1.4 2.6 3.5 2.6 2.6 2.7
Phillippines 0.8 1.1 0.9 1.1 1.3 1.0
Singapore 0.8 1.0 1.2 1.2 1.4 1.4
Hong Kong 2.1 1.9 1.7 1.7 1.8 1.8
Thailand 0.2 0.6 1.2 1.4 0.7 (Sept.) 0.5
Malaysia 1.3 1.3 1.4 1.4 (Sept.) 1.3 n.a.
Korea 0.6 0.2 0.9 1.3 1.1 1.1
India 0.8 1.0 1.1 0.9 (Jun.) 0.9 n.a.
Bangladesh 0.5 0.5 0.7 0.6 0.8 n.a.
Japan -0.7 -0.1 0.2 0.5 (Mar.) 0.4 n.a.
Others Germany 0.1 -0.1 0.1 0.3 (Jun.) 0.5 n.a.
USA 1.3 1.4 1.3 1.3 1.3 1.2
Canada 0.4 0.7 0.8 0.7 (Oct.) 1.0 n.a.
UK 0.4 0.6 0.7 0.8 0.5 n.a.
Netherlands 0.5 0.5 0.4 0.4 (Sept.) 0.4 n.a.
Switzerland 0.5 0.7 0.8 0.9 0.9 n.a.
Italy 0.5 0.5 0.6 0.7 0.8 n.a.
Belgium 0.5 0.5 0.6 0.7 (Jun.) 1.1 n.a.
France 0.5 0.4 0.5 0.6 n.a. n.a.
Australia 1.4 1.6 1.5 1.8 n.a. n.a.
1/ Source : Global Financial Stability Report (September 2007), IMF
 6

Loan Growth

30
% yoy

Comsumer
20 15. 9

10 Total Loans
2. 6

0 Corporate
-0. 9

-10

-20

-30
99 00 01 02 03 04 05 06 Q1 Q2 Q3
07

Consumer loan / Total loan = 23.1%

Corporate loan / Total loan = 76.9%
 Chronology of Incidents Measures 7

(Dual Crisis = Economic + Financial)

May 1996 - 1st Bank run on BBC and intervention (beginning of May 1996)
- Baht was being attcked a number of times
1997 - 2nd Bank run on 58 finance companies and intervention (3 March –
August 1997)
- Baht was floated from 25 to 45 baht per US$ (December 1997)
- Issued blanket guarantee for depositors & creditors (5 August 1997)
- Set up FRA + AMC (National AMC) to deal with 58 finance companies
(56 closed down + 2 survived). A year later FRA started to sell assets.
- Intervened on BMB (November 1997)
1998 - 1999 - Intervened in 5 banks and 7 finance companies (February 1998 to July
1999)
- Introduced “The 14 August 1998 packages” for mergers / acquisitions
and government’s capital support scheme.
 Chronology of Incidents Measures 8

(Dual Crisis = Economic + Financial)

1998 – 1999 - Recapitalized intervened FIs.
(continued) - Established the Corporate Debt Restructuring Advisory Committee
(CDRAC).
- Issued an Emergency Decree to set up Private AMC to accelerate
restructuring of FIs.
- Amended Bankruptcy Act and approved for the setting of the
Central Bankruptcy Court in 1999.
- Issued new loan classification, provisioning and interest
recognition rules (new 6 categories and new interest recognition)
- Allowed the use of hybrid capital instruments to recapitalize.
- Issued policies and measures to encourage debt restructuring.
 Chronology of Incidents Measures 9

(Dual Crisis = Economic + Financial)

June 2001 - Setting up of TAMC
2002 - 2004 - Amended definition of NPLs and regulation on loan
classification and provisioning.
- Established a credit bureau.
- Privatized intervened FIs. (2 Banks).
2005 - 2007 - The Cabinet approved the merger of the National AMC and
the Bangkok Commercial Asset Management Co., Ltd.
(BAM) FIDF in order to purchase NPLs and NPA from FIs.
¾ 1998 – 2002 Recapitalization of State-Owned Banks by the Authorities up to 716,929
million baht (by direct equity injection, debt/equity conversion, and
reversal of reserves from NPL transfer).
¾ 2002 – 2007 Tier 1 recapitalization of banks up to 253,018 million baht (by public and
private placement, conversion of convertible instruments, and issuance
of hybrid instruments). See details in slide 14.
 10

II. Regulatory & Supervisory Reforms

(1997 – 2007)
 11

Changing Financial Landscape

Pre-Financial Crisis, January 31, 1997 Post-Financial Crisis, December 31, 2003

1. Commercial Banks (31) 1. Commercial Banks (31)

¾ Locally-incorporated (15) ¾ Locally-incorporated (13)
¾ Foreign bank branches (16) ¾ Foreign bank branches (18)
2. International Banking Facilities (IBFs) 2. International Banking Facilities (IBFs)
attached to commercial banks (25) attached to commercial banks (24)
3. Stand-alone IBFs (17) 3. Stand-alone IBFs (5)
4. Finance and Securities Companies (91) 4. Finance and Securities Companies (18)
5. Credit Foncier (12) 5. Credit Foncier (5)
Total Number of Financial Institutions: 176 Total Number of Financial Institutions: 83
 12
Stage 1 : Cleaning up balance sheet and regulatory changes
Loan Classification & Provisioning
Before 1997 After 1997
Loan Classification Provisioning
Aging Provisioning Aging
1997-2005 Current (IAS39)
1. Pass - - - 1% 1%
2. Special mention - - more than 1 2% 2%
months
3. Substandard
- with collateral or more than 6 more than 3 100% of
no collateral months 15% months 20% PVCF of
- with collateral more than 12 debt or
months PV of
4. Doubtful (no more than 12 100% more than 6 50% collateral
collateral) months months
5. Doubtful of loss - - more than 12 100%
months
6. Loss worthless or written off worthless or written off written off
irrecoverable irrecoverable
assets assets
 13

Recapitalization & Opening up to foreign ownership

Unit : Million baht
Banks 2002 2003 2004 2005 2006 2007 Remark
(Tier 1) 9m
State – owned banks 13,164 4,479 Public Placement
Large private – 5,363 2,207 1,707 - Conversion of convertible instruments
owned banks and issuance of hybrid instruments, but
nearly paid back
Other private – 7,839 74,050 56,983 29,327 20,677 37,222 Public Placement, Private Placement,
owned banks and issuance of hybrid instruments

¾ Regulatory total BIS ratio maintained at 8.5% (Tier 1 = 4.25%), but the average actual
ratio stands at 15.1% (Tier 1 = 12.5%) as of Q3 / 2007.
¾ Foreign ownership 25% 100% for 10 years, after which foreign ownership
cannot be raised until capital increase has been diluted to below 49%.
Thereafter, the foreign stake can be increased up until the limit of 49%.
¾ Sales of distress assets to investors and AMCs.
 14

Stage 2 : Starting to make profit (2001 – 2007)

Moving to risk – based management & supervision

Risk – based supervision Consolidated - Migration into more IAS 39 = New

supervision consumer lending provision of 117,669
1. Strategic risk - Regulatory change million baht (Q3 / 07).
consumers protection
2. Liquidity risk
- Derivative products
Sound Practices for Managing Liquidity on the rise
3. Credit risk in Banking Organizations (2000) - Entrenching market
and counterparty risk
- BASEL I (1988) until end of 2008
management
4. Market risk - BASEL II (2004) effective at the end of 2008

Market risk management (1996)

5. Operational risk
- Sound Practice of the Management and Supervision of Operational Risk
- BASEL II (2004) effective at the end of 2008
 15

IAS 39 Implementation for provisioning

• Asset side
• Phasing-in Period (From End-2006 to End-2007)

Asset Classification Provisioning

Provisioning & Collateral

( Both Quantitative &

Qualitative Criteria) 1) PVCF of Debt
• Pass 1% 2) PV of Collateral
• Special Mention 2% 3) Historical loss rate
• Substandard (or Collective approach)
• Doubtful 100%
• Doubtful Loss
• Loss Write-off
 16

III. Retrenching the system and

preparation for the future
(2004 – 2007)
 FSMP 1 17

(2004 – beginning of 2007)

I II III
Measures to broaden Measures to increase
Measures to protect
general access to efficiency of the
consumers
financial services financial sector

ƒ In Urban Areas ƒ Rationalizing the structure ƒ Enhancing transparency

and roles of financial and information
ƒ In Rural Areas institutions disclosure
‰ Thai FIs
ƒ Constructing consumer
‰ Foreign-owned FIs
feedback /complaint
‰ One Presence Policy mechanisms
‰ Risk-weightings for
SMEs and Retail
customers
ƒ Streamlining rules
and regulations
 FSMP 1 18

(2004 – beginning of 2007)

Financial Landscape before FSMP* Financial Landscape post FSMP

1. Thai commercial banks 14

Thai commercial banks 13 - all of them are approved
Foreign Bank branches 18 financial conglomerates
2. Retail banks 3 35
IBFs attached to commercial banks 24 3. Foreign Bank branches 17
Stand-alone IBFs 5 4. Subsidiary 1
Finance companies 18
5. Finance companies 5
Credit fonciers 5 6. Credit fonciers 3 8

Total 83 Total 43
Average asset = 86 bil. baht Average asset = 209 bil. baht
* As of 31 Dec 2003
** Including merger between UOB Radanasin Bank PCL; and Bank of Asia PCL and between GE Money and Retail Bank with BAY
 FSAP in Thailand 19

(the end of 2004 – 2007)

1 2 3 4 5

Preparation 1st FSAP AML/CFT 2nd FSAP IMF/World

Mission Mission Mission Bank Board
2004 - 2006 Discussion
17 - 31 Jan 07 26 Feb - 13 Mar 07 24 May - 6 Jun 07 Feb 08

FSAP Preparation ROSCs / FSAP Development Issues

ƒ Preliminary ƒ Banking supervision ƒ Insurance and pensions
assessment ƒ Securities market ƒ Housing finance and access to
ƒ Consultation with finance
ƒ Payment systems
TA ƒ Specialized Financial Institutions
ƒ Changes and ƒ Monetary policy transparency
(SFIs)
improvements ƒ AML / CFT
ƒ Legal issues
ƒ Final decision
ƒ Capital market development
ƒ Stress testing
ƒ Banking sector
Note : Preparatory period started in 2005
 FSMP 2 20

(2008)
Objectives
¾ Improve efficiency, competitiveness, and resiliency of the financial sector
¾ Promote financial access

Pillar 1
Reduce operating costs

Pillar 2
Increase Efficiency & Competition

Pillar 3
Strengthen Institutional Infrastructures
Note : Preparation period started in 2007
 FSMP 2
21

ƒ Areas of policy measures in FSMP- II: 10 Loops

‰ Cost reduction: relaxation of rules and regulations
‰ Future financial landscape
‰ Enhance competition and efficiency
‰ Legal Framework
‰ Information system, transparency, and enhanced market discipline
‰ Risk transfer mechanism
‰ Financial access (esp. role of SFIs )
‰ Human resource development
‰ Payment system
‰ Corporate social responsibility
 22

Basel
BaselIIII and
and the
the 33 Pillars
Pillars
Pillar I Pillar II Pillar III
Minimum Capital Supervisory Review
Requirements Process Market Discipline
Four key principles : Disclosure of information; e.g.
Calculation of minimum
1. Banks’ Own - Capital adequacy
capital requirements on
Assessment of Capital - Risk management
- Credit risk
Adequacy (ICAAP) process (including credit
- Operational risk
2. Supervisory Review risk, market risk,
- Trading Book Issues
Process operational risk, IRRB).
(including market risk)
3. Capital Above
Regulatory Minimum
4. Supervisory
Intervention
 Basel II Implementation Timeframe
23

BOT to
issue the AIRB Approval process
final draft
of Policy
Statement SA/FIRB Approval process

Q1 Jun Q3 Dec Sep Dec Q3 Dec Q3 Dec Dec

2006 2006 2006 2007 2008 2009 2010

Banks submit
Banks final application
submit
Operational risk
preliminary
implementation BIA / SA PC X X X
plans
Quantitative Credit risk
impact study SSA / SA PC X X X
FIRB PC X (95%) X (90%) X (80%)
AIRB PC PC X (90%) X (80%)

PC = Parallel Calculation X = implementation year xx% = Floor