Bangkok--Sep 28--FITCH Ratings
Opening Address
Dr. Tarisa Watanagse
Deputy Governor, Bank of Thailand
“FITCH Ratings’ Annual Conference 2005
on Key Developments in Financial System and Capital Markets”
Bangkok, Thailand
September 27, 2005
Distinguished Guests, Ladies and Gentlemen
I would like to thank FITCH Ratings for inviting me to speak at this conference on “Key Developments in Financial System and Capital Markets”, an important topic for periodic stock taking and sharpening the focus going forward. While you would learn more about the specific issues that the organizer has planned for you in following sessions, I thought I would take this opportunity to share with you the Bank of Thailand’s perspectives on some of the key challenges that will likely shape policy thinking and impact the financial system in the next few years.
First, it is clear that implementation of the Financial Sector Master Plan will significantly change Thailand’s financial landscape. The rationalization and consolidation process entailed by the Plan will see the creation of three new commercial banks, four new retail banks, as well as two new full branches and a subsidiary of foreign banks. The BIBFs will be completely gone; and finance and credit foncier companies will soon disappear, too. The scope of banking businesses has been expanded so that, in providing universal banking services, commercial banks can better take advantage of the economy of scope and scale. On the other hand, retail banks will be niche players in the market, focusing on retail and SME customers. The bottom line is we expect to see greater competition and efficiency in the banking sector as a result of these changes.
It will take a few years for financial institutions to adjust to the new operating environment. The authorities will also need time to assess the full implications of this first phase of the Master Plan, both in terms of competition and efficiency in the banking industry and in terms of systemic stability. If everything is on track, we would then be able to embark on the next phase of the Master Plan, in which we envisage further liberalization and a gradual opening up of the financial system. This will be the second big challenge for everyone.
It is our duty as policymakers to try our best to make sure that the scope and pace of such liberalization do not pose any threat to systemic financial stability. But having said that, I need to emphasize that all financial institutions absolutely cannot afford to be complacent. They need to gear up for the upcoming challenges and continue to build on the progress they are making, especially in terms of improved risk management capability and operational efficiency. Despite commendable efforts and progress that have been made in the last few years, I am sure you all know that a lot remains to be done.
The third and last major challenge I would like to share with you today can be grouped together under the adoption of international standards and best practices related to financial supervision. I would like to highlight just two major elements: consolidated supervision and Basel II.
First, consolidated supervision. We will soon be issuing a comprehensive policy statement detailing how we will go about supervising banking groups on a consolidated basis. The scope of the banking groups will be more clearly defined and their operations subject to supervisory guidelines on a consolidated basis, inclusive of subsidiaries, affiliates, and other entities in which banks have substantive holdings. Supervisory guidelines will include, among other things, intra-group transactions, capital adequacy, and large exposure on a consolidated basis, as opposed to solo basis as is currently the case. This will no doubt be a major change in the regulatory framework, but it is a necessary one. Banks will need to make adjustments to their business structure and holdings. We will, however, give banks sufficient transition period to ensure a smooth adjustment.
As for Basel II, it is, in my opinion, not so much about capital calculation, but more about risk management. While we will allow banks the choice to adopt any approach they wish, it is our hope that the bigger banks with more wide-ranging and complicated business structure would, in time, strive to adopt the more advanced approaches that are more risk-sensitive. Most Thai banks, if not all, however, are likely to adopt the Standardized approach as a first step, before they can build up adequate data for the implementation of IRB approaches. Nevertheless, the push for more vigorous risk management can and will proceed without waiting for banks to adopt IRB approaches. In fact, a number of guidelines to strengthen banks’ risk management in the areas of internal rating system, loan portfolio management, credit scoring, risk model validation and credit and market risk stress testing have been issued, and we expect banks to actively use these tools. These tools are useful not only for risk management purposes, but also for gaining competitive edge by enabling banks to price loans more competitively in accordance with customers’ risk profile. Building upon this, banks should be able to identify the target customer base to suit their strategy on risk-return trade-off as well portfolio diversification.
Basel II is different from the current capital accord in that it also incorporates the so-called Pillar 2 and 3. Pillar 2 basically provides for a supervisory review on banks’ internal capital adequacy assessment process. It will enable supervisors to set additional capital cushion on top of the minimum requirement to cover risks not explicitly addressed under Pillar 1. More importantly, by adjusting this capital add-on, it will give the authorities a useful tool to counter the pro-cyclical tendency that is inherent to a risk-sensitive capital regime under Pillar 1.
Pillar 3 of Basel II hinges on market discipline through greater disclosure by financial institutions. To be sure, this requirement may be somewhat daunting and could be quite costly. The challenge is to strike a proper balance between costs and benefits. To be an effective market disciplining tool, the level and complexity of information disclosed has to go hand-in-hand with the level of financial literacy of the general public.
All of this is of course a big challenge for everyone concerned. An effective implementation of Basel II will take a lot of time and investment, not least in terms of developing a good database, IT systems, and human resources. Again, the Bank of Thailand will be working closely with the industry and give them support where necessary.
Ladies and gentlemen, I have touched on what I think are some of the key policy issues that will have a significant bearing on the financial sector in the years ahead. They are by no means exhaustive, but I hope they provide a useful context in which you can explore specific issues in more detail during the remainder of this conference. Without further ado, let me wish you a fruitful day, and with this, I declare the conference open.
Thank you.
End.