The Deposit Protection Act, which takes effect today, is intended to instill discipline among deposittaking financial institutions and depositors in Thailand. It is also designed to lay down a permanent and self-sustainable deposit insurance system, so that the authorities will not need to raid the state coffers and create a burden on taxpayers in the case of bank failures. However, I think this new law will unintentionally have several profound impacts on both banks and depositors. The effects will take place over the course of four years, with the Act expected to unleash its full impact on banks and savers in August 2012. By that time, I think there will be several mergers and acquisitions among those banks who cannot properly adjust themselves and stand alone to keep pace with the intense competition for deposits. In Thailand the big banks do have an edge over the smaller ones, as people perceive them to be safer. There is a direct relationship between the asset size of the banks and the deposit rates they offer. In other words, large banks have been historically offering lower deposit rates than their smaller peers. Because of the new Act, bigger banks will enjoy even lower funding costs than smaller players as depositors will shift their money into the perceived safer banks, especially the five largest ones. The effects of the Deposit Protection Act, together with the new capital requirements (Basel II) and the soon-to-be-implemented accounting rules (IAS 39), will not make it easy for small banks to expand credit and make inroads into new areas or customer bases. This is because they will face limits and pressure from all sides: from the bottom, the need to maintain sufficient capital; from the middle, the need to secure an unwavering deposit base; and from the top, the need to curb the credit risk and ensure sound, quality assets. The big five banks are therefore likely to gain market share in both deposits and assets. The rest of the field - relatively small banks, finance companies and credit fonciers - will have to work much harder, and be creative and innovative in coming up with new products to attract depositors, such as health-insurance deposits, stock market-linked deposits and money market fund-linked deposits. Depositors will alter their behaviour, too. They will not make longterm fixed deposits but will opt instead for short terms such as three or six months. Depositors will more regularly evaluate banks' perceived safety image and their offers, and may switch allegiance from one institution to another. The five large banks are likely to reap windfalls in the process.Institutional depositors such as the Government Pension Fund, the Social Security Fund, provident funds, retirement mutual funds and other mutual funds, which together have more than Bt2 trillion, and savings cooperatives and savings groups, foundations and charities - with combined deposits of more than Bt400 billion in the financial system - will become more cautious and put serious consideration to where they deposit their money. They will consider deposits as another asset class that must be compared on a commensurate risk-and-return basis vis-a-vis other forms of investment asset classes. The small banks should target these groups of depositors as replacements for retail depositors leaving their ranks. In summary, how strong the consolidation in the Thai banking sector will be depends on how well the small banks adjust themselves to this new law. The next few years will be crucial for the state of these banks, and time will tell whether even the toughest and the fittest will survive without having to merge or be acquired by the bigger banks. I believe some of these small banks can survive, but they have to start adjusting themselves quickly in line with the new law and regulations - and start employing creative strategies now. By: Dr.Chodechai Suwanaporn emial: [email protected] Source: Fiscal Policy Office / www.fpo.go.th