Browse Profiles > Thailand > Core Principles for Effective Banking Supervision
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Thailand

Core Principles for Effective Banking Supervision

Summary
Thailand's financial sector has transformed significantly since the financial crisis of 1997, and the authorities have taken several reform measures in recent years to ensure a sound and stable system. For example, Thailand's Financial Sector Master Plan is a 5-10 year development plan that began its first phase in 2004 and had as one of its primary goals the implementation of an efficient, sound and competitive financial sector in Thailand. Further, according to a 2006 report by the World Bank, the Thai authorities together with the Bank launched a Country Development Partnership on Financial and Corporate Competitiveness (CDP-FC) that resulted in the enhancement of the regulatory and supervisory regime of the financial sector. A 2006 Selected Issues paper by the International Monetary Fund (IMF) also alludes to Thailand's ongoing reforms to improve regulatory oversight, including its significant legislative changes. For instance, the authorities have drafted the Financial Institutions Business Act (FIBA), which is expected, among other things, to strengthen the Bank of Thailand's (BoT) supervisory powers and its independence. Per a 2008 International Financial Law Review article, Thailand enacted the FIBA in late 2007. T. Watanagase, the present governor of the BoT, mentions in a 2006 report that the regulatory authorities in Thailand were in the process of working towards achieving compliance with international standards and codes in anticipation of the IMF's Financial Sector Assessment Program of Thailand in 2007. Apart from reports indicating Thailand's ongoing reforms and progress, there is little information publicly available in terms of Thailand's actual compliance with the Basel Core Principles for Effective Banking Supervision.

    General Overview

    The International Monetary Fund (IMF) in 2007 published a selected issues report for Thailand (hereafter referred to as the IMF's 2007 report) in which it states that the financial architecture in Thailand, especially the banking sector, has changed significantly since the 1997 financial crisis. The Bank of Thailand (BoT) is the governmental agency responsible for banking supervision in the country. However, according to a 2006 World Bank report on Thailand's Country Development Partnership, "most legal powers, especially the major ones including granting and revoking licenses, etc., remain with the Ministry of Finance (MoF)" (p. 47). The BoT, according to its "Annual Economic Report 2006," has implemented a risk-based supervisory process and is slated to implement Basel II by the end of 2008.
    Watanagase (2006) notes that the regulatory authorities in Thailand were working towards achieving compliance with international standards and codes in anticipation of the IMF's Financial Sector Assessment Program (FSAP), which was expected to be completed in the latter half of 2007. The report further states that a few of the underlying causes of the financial crisis of 1997 were poor corporate governance, poor risk management, and the lack of accurate and timely data, all of which are being addressed in Thailand's Financial Sector Master Plan (FSMP). The FSMP, according to a 2006 BoT document on the Plan, is a 5-10 year development plan that began its first phase in 2004 and aims to: (1) bring about enhanced and comprehensive financial services access to all potential users; (2) bring about an efficient, sound, and competitive financial sector; and (3) protect consumer interests. One of the policy implementations of the FSMP resulted in a new deposit-taking framework with only four types of financial institutions - commercial banks, retail banks, foreign bank branches, and subsidiaries of foreign banks. According to a 2007 BoT discussion paper by Nakornthab, during the 1997 crisis there were many high-risk finance (and credit foncier) companies and international banking facilities (IBFs), all of which are expected to cease to exist in accordance with the new deposit-taking framework. This new framework has also caused the number of banks operating in the country to decrease substantially.
    The World Bank, according to its 2006 report, launched a Country Development Partnership on Financial and Corporate Competitiveness (CDP-FC) with Thailand in April 2003. This was a voluntary undertaking on the part of the Thai authorities. The partnership concluded in June 2006 and the World Bank's 2006 report enumerates the outcomes of several components of this project, one of which is the enhancement of the regulatory and supervisory regime of the financial sector. The report notes that the outcome of this component has been satisfactory and "includes the following: (1) enhanced supervision and capacity of financial institutions' supervisors; (2) improved framework for the supervision of financial conglomerates and increased cooperation across regulatory agencies; and (3) enhanced disclosure by financial institutions" (p. 47).
    The main laws governing financial sector supervision in Thailand are the Bank of Thailand Act of 1942, the Commercial Banking Act of 1962, and the Exchange Control Act of 1942 (BoT website). The IMF's 2007 report mentions that "a host of reforms are underway or in the pipeline to upgrade regulatory oversight, including through legislative reforms and the adoption of risk-based supervision" (p. 48). The IMF adds that the legislative reforms underway are amendments to the BoT Act that would increase the operational independence of the BoT and the implementation of the Financial Institutions Business Act (FIBA), which is expected to strengthen the BoT's supervisory powers. Per a 2008 International Financial Law Review article, Thailand enacted the FIBA in late 2007. The BoT reported in 2006 that the FIBA is expected to substitute for the 1962 Commercial Banking Act and the 1979 Act on the Undertaking of Finance Business, Securities Business, & Credit Foncier Business. The 2006 World Bank report states that "the draft new Financial Institutions Law aims to provide more independence and accountability to the bank supervisor, empowers the BoT to conduct consolidated supervision, introduces a risk-based supervisory framework, facilitates clearer definitions of connected lending, and defines a framework for the orderly and timely exit of problem institutions" (p. 47).
    The IMF reports in 2007 that as of September 2006 there were 43 financial institutions in Thailand, with the average capital adequacy ratio for the banking system at 14 percent. The IMF report also notes that "while the quality of bank assets has improved, the level of distressed assets (NPLs and foreclosed assets) in the banking system remains still high and continues to pose a risk to banks" (p. 43). Non-performing loans (NPLs) are among the highest in the region.


    The Principles

    1. (1) Clear responsibilities and objectives for each supervisory agency.

    According to a 2006 report by T. Watanagase, the Commercial Banking Act of 1962 does not clearly define the role and responsibility of the BoT. Per the report, however, the Financial Institutions Business Act, which was expected to be implemented in 2007, will address this issue. The BoT's 2006 annual economic report states that the BoT has "the responsibility to supervise and to ensure safety and soundness of the financial institutions and the financial sector" (p. 108). In order to ensure this, the BoT follows risk-based supervision, conducting on-site examinations and monitoring the performance of financial institutions so as to be able to provide prompt corrective actions for problem banks. However there is insufficient information publicly available addressing Thailand compliance with this principle.

    1.(2) Operational independence and adequate resources.

    The IMF's 2007 report notes that expected amendments to BoT Act will increase the operational independence of the BoT. A 2006 World Bank report adds that "the draft new Financial Institutions Law aims to provide more independence and accountability to the bank supervisor" (p. 47). However there is little information publicly available directly addressing Thailand compliance with this principle.

    1.(3) A suitable legal framework for authorization and ongoing supervision.

    The IMF's 2007 report expects the implementation of the FIBA to strengthen the BoT's supervisory powers. A 2006 World Bank report notes that "lacking legal authority under current laws, the BoT has taken several measures to strengthen its regulatory framework. Directives and guidelines are being issued to compensate for the lack of clear legal authority and although this could be challenged and may make enforcement difficult, it is a positive step of the BoT" (p. 48). However there is little information publicly available directly addressing Thailand compliance with this principle.

    1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

    The BoT's 2006 annual economic report states that the BoT has "the responsibility to supervise and to ensure safety and soundness of the financial institutions and the financial sector" (p. 108). The IMF's 2007 report expects the implementation of the FIBA to strengthen the BoT's supervisory powers. A 2006 World Bank report notes that "lacking legal authority under current laws, the BoT has taken several measures to strengthen its regulatory framework. Directives and guidelines are being issued to compensate for the lack of clear legal authority and although this could be challenged and may make enforcement difficult, it is a positive step of the BoT" (p. 48). However there is little information publicly available directly addressing Thailand compliance with this principle.

    1.(5) Legal protection for supervisors.

    There is insufficient information publicly available addressing Thailand compliance with this principle.

    1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

    According to the BoT's website, "in order to improve the effectiveness of supervision, the BoT and other regulatory agencies such as the Ministry of Finance (MoF), the Ministry of Commerce (MoC), the Securities and Exchange Commission (SEC), the Anti-Money Laundering Office (AMLO), and the Stock Exchange of Thailand (SET) work in close cooperation to exchange supervisory information." However, there is insufficient information publicly available addressing Thailand compliance with this principle.

    2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

    According to a 2006 World Bank report, "most legal powers, especially the major ones including granting and revoking licenses, etc., remain with the Ministry of Finance (MoF)" (p. 47). The BoT 2006 report notes that one of the policy implementations of the FSMP resulted in a new deposit-taking framework with only four types of financial institutions - commercial banks, retail banks, foreign bank branches and subsidiaries of foreign banks. According to a 2007 BoT discussion paper by Nakornthab, during the 1997 crisis there were many high-risk finance (and credit foncier) companies and IBFs, all of which are expected to cease to exist in accordance with the new deposit-taking framework. Nonetheless, there is little information publicly available addressing Thailand compliance with this principle.

    3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

    There is insufficient information publicly available addressing Thailand compliance with this principle.

    4. Authority to review and reject transfer of ownership.

    There is insufficient information publicly available addressing Thailand compliance with this principle.

    5. Authority to review major acquisitions and investments.

    There is insufficient information publicly available addressing Thailand compliance with this principle.

    6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

    A 2007 report by Nakornthab states that "in 2006, the solvency position of Thai commercial banks improved further. Although one bank's capital adequacy ratio fell below the regulatory minimum of 8.5%, the Tier 1 and the total capital adequacy ratios of Thai commercial banks as a whole rose from 10.0 and 13.2 at the end of 2005 to 10.9 and 13.8 at the end of 2006, respectively" (p. 8). Further, according to the IMF's 2007 report, the average capital adequacy ratio for the banking system was 14 percent at the end of September 2006. However, there is little information publicly available directly addressing Thailand compliance with this principle.

    7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

    According to the BoT's 2006 report, in anticipation of the implementation of International Accounting Standard 39 by banks in 2008, the BoT has revised the regulation on loan classification and provisions. The 2006 World Bank report states that "the regulations on loan classification and provisioning requirements have improved and enforcement has tightened although the regulations are still subject to interpretation which can lead to an uneven implementation by financial institutions" (p. 47). However, there is little information publicly available addressing Thailand compliance with this principle.

    8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

    According to the IMF's 2007 report, the quality of bank assets in Thailand has improved in recent years. Nonetheless, the level of distressed assets (NPLs and foreclosed assets) is still high enough to pose a risk to banks, and the NPL ratio at 7.5 percent (at end-2006) is among the highest in the region. The IMF report, however, maintains that banks have high loan loss provisions. To its merit, the BoT in 2006, announced several steps to accelerate the resolution of distressed assets in the banking system and to improve loan classification and provisioning practices per the IMF report. However, there is little information publicly available addressing Thailand compliance with this principle.

    In 2006, the BoT reports that, in anticipation of the implementation of International Accounting Standard 39 by banks in 2008, the BoT has revised the regulation on loan classification and provisions. Further the 2006 World Bank report states that "the regulations on loan classification and provisioning requirements have improved and enforcement has tightened although the regulations are still subject to interpretation which can lead to an uneven implementation by financial institutions" (p. 47).

    9. Prudential limits and management information system on concentration of exposure.

    There is insufficient information publicly available addressing Thailand compliance with this principle.

    10. Arm's length rule and monitoring for connected lending.

    A 2006 World Bank report notes that "the draft new Financial Institutions Law aims to... facilitates clearer definitions of connected lending, and defines a framework for the orderly and timely exit of problem institutions" (p. 47). However, there is insufficient information publicly available addressing Thailand compliance with this principle.

    11. Policies and procedures for country risk and transfer risk.

    According to the 2006 BoT report, the BoT has stipulated a policy statement on country risk management. However, there is insufficient publicly available information addressing Thailand's compliance with this principle.

    12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

    According to a 2006 report by T. Watanagase, "the Bank of Thailand introduced a market risk supervision policy in line with the Basel standard in December 2003, giving commercial banks a one and a half year adjustment period. Starting from June 2005, commercial banks have maintained capital against the market-specific and general risks according to 1996 Basel market risk guidelines" (p. 358). Per the IMF 2007 report, "market risks do not appear to pose a significant risk to Thai banks" (p. 44).

    13. Comprehensive risk management processes.

    The IMF's 2007 report states that banks in Thailand have begun implementing more modern risk management techniques. The report further states that in anticipation of Basel II implementation in 2008 the BoT "has developed a range of database and risk-management systems and a framework for cross-border supervision and training programs for supervisors. This includes the use of scenario analysis, the development of an early warning system on a bank-by-bank basis, and the publication of quarterly macro prudential indicators. The BoT has also issued five prudential guidelines to enhance banks' risk-management practices: internal rating systems, credit risk management of loan portfolios, credit scoring, risk model validation, and credit and market risk stress testing" (p. 50). However, there is little information publicly available addressing Thailand compliance with this principle.

    14. Adequate internal controls.

    There is insufficient information publicly available addressing Thailand compliance with this principle.

    15. Strict "know-your-customer" rules and high ethical and professional standards.

    The IMF's 2007 report titled "Thailand: Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism" states that "there is a limited range of preventive measures applying to the FIs contained in the AMLA, and regulations made pursuant to it, which apply to the most important types of FI in Thailand" (p. 12). The IMF also notes that Thailand is non-compliant with all FATF recommendations relating to customer due diligence (CDD), including enhanced or reduced measures, namely R. 5-8. The report, however, notes that the BoT has invariably issued guidelines which explain know your customer (KYC) and CDD requirements for financial institutions. However, the BoT has limited powers of enforcement with regards to implementation of these measures and has to rely on the industry's commitment to do so. However, there is insufficient information publicly available addressing Thailand compliance with this principle.

    16. Effective supervisory system consisting of on-site and off-site supervision.

    The 2006 World Bank report states that "detailed manuals for on-site and off-site examination have been developed and are being applied" (p. 47). According to its 2006 Annual Economic Report, the BoT conducts on-site and off-site supervision of banks in Thailand. In 2006, the report notes, there were 57 off-site examinations undertaken. The 2006 BoT report states that "offsite monitoring and analysis focuses on financial conditions, performance, capital adequacy, and risk management of each financial institution. The analysis reports are created quarterly for Thai financial institutions and semi-annually for foreign bank branches and specialized financial institutions. In addition to the individual report, overall performance reports of Thai commercial banks, finance companies, credit foncier companies, and asset management companies, as well as the system-wide report, are also conducted" (p. 110). Nonetheless, there is little information publicly available addressing Thailand compliance with this principle.

    17. Regular contact with bank management and understanding of bank's operations.

    There is insufficient information publicly available addressing Thailand compliance with this principle.

    18. Analytical reports and statistical returns on solo and consolidated basis.

    There is insufficient information publicly available as to Thailand's compliance with this principle. However, the 2006 BoT report states that "analysis reports are created quarterly for Thai financial institutions and semi-annually for foreign bank branches and specialized financial institutions. In addition to the individual report, overall performance reports of Thai commercial banks, finance companies, credit foncier companies, and asset management companies, as well as the system-wide report, are also conducted" (p. 110).

    19. Independent validation of supervisory information through on-site examination or external auditors.

    The 2006 World Bank report states that "detailed manuals for on-site and off-site examination have been developed and are being applied [and] there is a certification process for commissioned examiners" (p. 47). According to its 2006 report, the BoT conducts on-site examinations once every year which assess the banks financial conditions, performance, and risk-management practices. The emphasis is on the level and quality of risk management in five areas: strategic risk, credit risk, market risk, liquidity risk, and operational risk. On-site supervisors also check to ensure compliance with the law, BoT regulations, and corporate governance practices. According to the BoT, in 2006 there were 57 off-site examinations undertaken. Nonetheless, there is little information publicly available addressing Thailand compliance with this principle.

    20. Ability to supervise on a consolidated basis.

    According to the BoT 2006 report, the BoT has issued a Guideline on Consolidated Supervision in July 2006 and had asked commercial banks to comply with this Guideline by January 2007. The report further states that "the Guideline is based on the study of international practices on consolidated supervision" (p. 101). However, there is little information publicly available as to whether banks in Thailand have begun complying with this Guideline and there is also scant information addressing Thailand's compliance with this principle.

    21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

    According to the 2006 report by the World Bank, "the accounting, auditing, and disclosure environment for the financial sector has improved, but is not yet substantially consistent with international standards and practices. Thailand has announced a plan to fully adopt international accounting standards (IAS) based on the Thai economy and state of development by end 2006" (p. 48). However, according to a 2007 PricewaterhouseCoopers report, as of August 2007, the Federation of Accounting Professions had published only a total of 28 draft Thai Accounting Standards. The World Bank report notes that with implementation of Basel II (specifically Pillar II) financial institutions will be required to disclose risk related information. However, there is insufficient information publicly available addressing Thailand compliance with this principle.

    22. Adequate supervisory measures to ensure timely corrective action.

    A 2006 World Bank report notes that "the draft new Financial Institutions Law aims to... define a framework for the orderly and timely exit of problem institutions" (p. 47). According to the report, the BoT was expected to issue a policy statement on preventive steps and prompt corrective action which would make the intervention process and exit procedure for problem financial institutions more transparent and understandable to the industry. However, there is little information subsequently as to whether this policy statement by the BoT has been announced and there is insufficient information publicly available addressing Thailand compliance with this principle.

    23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

    According to its website, "the BoT's emphasis on forging close links with relevant foreign supervisory authorities not only facilitates the implementation of global, consolidated supervision, but it also provides a sound basis to exchange relevant information that will be needed to validate risk models under the Basel II capital framework." Nonetheless, there is insufficient information publicly available addressing Thailand compliance with this principle.

    24. International exchange of information with other supervisors.

    Per the BoT's website, "to ensure that supervision of both the Thai [financial institutions] operating overseas and foreign bank branches operating in Thailand is efficient and in line with the rules and regulations imposed by other foreign supervisory agencies, the BoT regularly exchanges knowledge, experience and material information with relevant foreign supervisory authorities." Per the BoT's 2006 report, the bank signed memorandum of understanding on Information Exchange for Effective Cross-border Banking Supervision with China Banking Regulatory Commission and the Monetary Authority of Singapore. However, there is little information publicly available addressing Thailand compliance with this principle.

    25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

    There is insufficient information publicly available addressing Thailand compliance with this principle.

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    Sources of Assessment

    Bank of Thailand, "Annual Economic Report: 2006," 2006. Available from the Bank of Thailand website. Accessed on December 11, 2007. (BoT 2006)

    Bank of Thailand website. Accessed on December 11, 2007. (BoT website)

    International Monetary Fund, "Thailand: Selected Issues," Country Report No. 07/231, Washington, D.C.: IMF, June 2007. Available from International Monetary Fund website. Accessed on December 11, 2007. (IMF 2007a)

    International Monetary Fund, "Thailand: Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism," Country Report No. 07/376, Washington, D.C.: IMF, December 2007. Available from International Monetary Fund website. Accessed on December 11, 2007. (IMF 2007b)

    Watanagase, T., "Maintaining Financial Stability: The Experience of Thailand," in "The Banking System in Emerging Economies: How Much Progress Has Been Made?" Bank for International Settlements Paper No. 28, Basel, Switzerland: BIS, August 2006: pp. 347-361. Available from Bank for International Settlements website. Accessed on December 11, 2007. (Watanagase 2006)

    World Bank, "Thailand - Country Development Partnership: Financial and Corporate Sector Competitiveness Program Assessment and Completion Report," June 2006. Available from World Bank website. Accessed on December 11, 2007. (WB 2006)

    Relevant Organizations

    Bank of Thailand (BoT)

    Ministry of Finance (MoF)



    Relevant Legislation/Regulation

    Bank of Thailand Act, 1942

    Commercial Banking Act, 1962

    Exchange Control Act, 1942

    Notifications and Circulars of the Bank of Thailand

    Act on the Undertaking of Finance Business, Securities Business & Credit Foncier Business, 1979



    Supplementary Sources

    Bank of Thailand, "Thailand's Financial Sector Master Plan Handbook," August 2006. Available from the Bank of Thailand website. Accessed on December 11, 2007. (BoT 2006)

    Nakornthab, Don, "Thai Commercial Banks One Decade after the Crisis: Assessment of Risk to Financial Stability," Bank of Thailand, Discussion Paper, July 2007. Available from the Bank of Thailand website. Accessed on December 11, 2007. (Nakornthab 2007)

    PricewaterhouseCoopers, "Quarterly Financial Reporting Update," Issue 11, February 2007. Available from PricewaterhouseCoopers Thailand website. Accessed on December 9, 2007. (PWC 2007)

    International Financial Law Review, "Thailand: New Financial Legislation," January 2008. Available from International Financial Law Review website. Accessed on January 9, 2008. (IFLR 2008)

    Watanagase, T. "Bank of Thailand's Strategy to Implement Risk-Focused Supervision," 2000. Available from Bank of Thailand website. Accessed on January 9, 2008. (Watanagase 2000)
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