Tarisa Watanagase: Strengthening the banking and financial sector -
what needs to be done?
Speech by Dr Tarisa Watanagase, Governor of the Bank of Thailand, at Finance Thailand, a
seminar organised by The Banker Magazine and Financial Times Business, Bangkok,
22 February 2010.
* * *
Ladies and gentlemen,
First of all, I would like to thank The Banker Magazine and The Financial Times for the
invitation. It is an honour, and indeed an opportunity, to join all of you here at this conference,
and to share with you my thoughts at this very challenging juncture, not only for the global
economy and financial system, but also at an important stage for development of Thailand's
economic and financial sector.
The past three years have been one of the most turbulent periods in global economic
development.
On the global economy front, despite the signs of green shoots in the global economy, we
are constantly reminded of the remaining fragility and vulnerability of such recovery in
various hot spots around the world, with emerging new paradigm of risk, namely sovereign
risk.
For the global financial system, risk and challenges remain abound. The key challenge
strikes at the heart of the global financial system - regaining trust.
Trust in market mechanism, as well as its regulator, has been severely tested. The task of
setting a right balance in regulation, going forward, is still a global debate, in which the Bank
of Thailand is closely engaged in our role in various working groups of the Basel Committee
for Banking Supervision. On the one hand, it is critical that the global financial system
reestablishes such trust, and ensures stability, integrity, and fair consumer treatment. On the
other hand, the crisis has highlighted the complexity of the financial system, and the
globalness of financial contagion. Thus, there is a critical need for the authorities and the
financial market to work together to ensure that the emerging global standards and
regulations can handle such complexity, and remain risk-focused at the economic and
financial system, both in the national and global contexts. It is also important to avoid
introducing distortion and risk of regulatory arbitrage between financial markets, products,
and strategies, and most importantly, arbitrage between countries. Thus, the strong impetus
on supervisory coordination, cross-border risk and coordination, as well as macro-prudential
aspects are the new challenges.
Turning to the situation in Thailand, thus far, despite some set-back in terms of economic
contraction in the past year, both the Thai economy and financial system have shown
resiliency and robustness. This helps to stand us in good stead, and provide a strong
grounding to forge our strategy to handle coming challenges.
Nevertheless, looking ahead into the longer term, Thailand's economic and growth potential
is still not fully and efficiently harnessed. Economic efficiency, international competitiveness,
and economic stability are keys to sustainable growth. A robust and stable financial system,
that we have managed to ensure so far, is a necessary, but not sufficient condition for
achieving sustainable growth. Financial system efficiency needs to be upgraded, so that it
serves to lift economic efficiency, not least by harnessing the hitherto untapped strength of
the grass-root economies, where the emerging organic social-economic network has
increasingly highlighted the potential contribution to growth and welfare improvement. For the
banking system, the strategy to harness this potential is set out in the Financial Sector
Master Plan Phase 2, which is a continuation from Phase 1.
Ladies and gentlemen,
The challenges I have raised, together, pose a tall order. So in today's talk, let me set out our
strategy and policy priority in three parts.
First, the SWOT analysis of the banking system and the challenges we face;
Second, the key strategies in the Financial Sector Master Plan Phase 2; and
Third, the key measures in risk-based supervision to ensure stability.
First, the strength of our banking system is evident in its continuous solid performance.
During the toughest times, our banks remained strong and resilient against the backdrop of
economic slowdown. Loan decelerated, partly due to contraction in corporate portfolio and
deceleration in household portfolio, as a result of more cautious business undertaking and
household spending, and partly due to tightened loan underwriting standard. The good news
is the figures are already starting to pick up again. Meanwhile, NPL and delinquency have
continued to decline, as the ratio of NPL, net of provisions, to total loans has declined further
to 2.7 percent as banks attentively monitored their asset quality. Moreover, profit continued
to be recorded for nine consecutive years, and the overall capital position of the banking
system strengthened further, with BIS ratio at 16.1 percent, of which 12.6 percent is Tier 1
capital.
Much of the current strength and resiliency of our banking sector owes a great deal to the
reform groundwork laid during the past decade. On prudential supervision, as apart from
requiring banks to conform to international best practices on risk-based supervision under
Basel I and now Basel II, the Bank of Thailand also moved to strengthen our supervisory
function, utilising both on-site and off-site supervision as well as asking banks to carry out
stress tests on a regular basis.
The key here was to strengthen banks' own risk management culture and system. Works on
strengthening the financial infrastructure were started and are still on-going. In this regard,
various initiatives were introduced, including the long-term effort to reshape the financial
system, and address inherent structural weaknesses, that was the mission of the Financial
Sector Master Plan Phase I. The establishment of the National Credit Bureau to improve
credit information, and improvements in financial legislations, including the new Financial
Institutions Business Act, the Bank of Thailand Act and the Deposit Protection Agency Act.
Today, our banking sector fundamentals continue to be strong, serving as a dependable
pillar for our economy. Despite this advantage, the Bank of Thailand is not complacent and
we will continue to prepare our banking sector for future challenges.
In this regard, a SWOT analysis of our current financial institutions system reveals that while
there was overall improvement in efficiency and soundness, operating costs remained high
and financial access gaps remained. Furthermore, there was still inadequate financial
infrastructure to support risk management of financial institutions. Meanwhile, future
challenges of the next five years would likely come from more intensified competition - not
only among banks, but from capital market, both local and overseas. It would also come from
more complex and varied needs for financial services, as a result of globalizations and aging
population, the shift in resource allocation with greater role of domestic demand vis-à-vis
external demand as engine of growth, and finally, capital inflows and external challenges
from the global economic crisis. Taken together, these remaining areas of improvement and
the need to tackle future challenges have led to the recent launch of the second phase of
financial sector reform.
second
This brings me to the part of my talk: key strategies in the Financial Sector Master
Plan Phase 2.
When thinking about characteristics that our future financial system is envisioned to have,
several keywords come to mind: efficiency, strength and resiliency, diversification, fairness
and transparency. With all of these keywords in mind, measures under the Financial Sector
Master Plan Phase 2 are grouped into three main pillars, aimed to tackle the following tasks:
first, reducing system-wide operating costs, namely regulatory and legacy NPL and NPA
costs; second, promoting competition and financial access; and third, strengthening financial
infrastructure.
On the first pillar. In any business undertaking including banking business, operating cost
reflects efficiency and while this translates to cost of consumers through pricing of services, it
also affects competitiveness of the industry. The latter point is particularly true, given the
trend toward further financial globalization and liberalization. As such, the first pillar would
focus on reducing two important operating costs for the whole financial system, namely
regulatory cost and legacy NPL and NPA cost.
Next, on the second pillar. It is envisaged that competition would be strengthened through
new entries and expansion of existing service providers' business scope. In so doing,
efficiency would be enhanced through more competitive pricing and service quality and
greater opportunities for broader financial access would be introduced.
As for financial access, the idea is to encourage and facilitate the market mechanism by
commercial service providers. To achieve this, we will help banks identify where the unmet
demand is and encourage them to explore and adopt suitable microfinance business models.
For new service providers, we will consider providing opportunities for those with business
model and expertise that can help further enhance market completeness, to enter the market
under a restricted license. This may, for example, include microfinance bank, custodial or
trust bank, Islamic bank, and investment bank. Such entry would depend on the value added
generated for the economy, in terms of increased efficiency in services, and expanded
access to underserved segments. In the last year of the Plan, 2014, we may also consider
entry in terms of full commercial bank license, if this adds value to the economy, through
serving Thailand's international trade and investment interest, including trends in regional
integration.
We will also work on improving and developing necessary financial infrastructure to support
banks and other microfinance service providers in reaching this untapped market. And for the
still missing pieces of the jig-saw, SFIs will take the lead.
On the third pillar. There are five key areas of financial infrastructure improvement. First, in
response to changes in customer needs that are becoming more complex, efforts would be
made to enhance the capability and tools for risk management of financial institutions,
including credit, market, liquidity, and settlement risks.
Secondly, there needs to be improvement in the information system for risk management of
financial institutions to help them in strategic planning and service expansion, while of
course, ensuring appropriate protection of client confidentiality.
Thirdly, financial laws that support risk management of financial institutions in dealing with
credit risk and NPL and NPA management would be reviewed.
Fourthly, the information technology infrastructure and capacity of financial institutions would
be strengthened, thus allowing more efficient utilization of technology to serve increasing
customer needs, while supervisory standards would focus on ensuring security of services.
Finally, there is the need to enhance the capacity of human resource in the banking sector.
Ladies and gentlemen,
In any financial system development and reform, regulation must be able to keep up. Let's
now turn to the third and final part of my talk: key measures in risk-based supervision to
ensure stability.
In this regard, the Bank of Thailand continues to work closely with the Basel Committee,
through our participation as member of the Standard Implementation Group, or the SIG, and
Basel Consultative Group, or the BCG, as well as work with other regulators in the EMEAP
region to reform the global financial system. Through these forums, we participate in key
reform areas such as refining of risk measurement, formulating measures in handling
systemically important institutions, calibrating regulations, such as Basel II capital
requirements, stress-testing, and accounting rules to alleviate such problems.
Our role in these forums helps us to steer much reform in ways that are consistent with our
own national context, and would be key to ensure proper matching of risk profile in our
system with emerging regulations.
At home, empowered with the recent improvement in the legal framework, namely the
Financial Institutions Business Act, we will remain committed to performing risk-based
supervision and ensuring proper governance within individual financial institutions.
There has also been increasing recognition of the need for macro-prudential policy in dealing
with the problem of systemic risk as well as coordination between monetary policy and
financial system policy, given that such measures could likely have a macroeconomic impact.
The idea is not new to us as you may recall our prior uses of loan-to-value ratios and
tightening of credit card rule to prevent the build-up of vulnerabilities in the real estate and
household sectors.
Ladies and gentlemen,
When all things considered, though regulatory weakness was partly to be blamed for the
recent global financial crisis, it is not that the tenet of risk-based supervision is flawed, but
rather failures occurred where there was complacency in overestimating the ability to
understand and manage such risks.
Therefore, I believe one of the key lessons to be drawn from this global crisis is that we must
put great focus and vigilance on supervisory process, rather than just redrafting the
written regulation.
Finally, there is pressing call for stronger international cooperation and dialogue among
supervisors. This is so because the complexity and cross-border linkages of financial
systems will continue to increase and while we are still grappling with the appropriate
supervisory structure to handle cross-border issues, information flows, at this time, continue
to be limited. Thus, without effective communication and cooperation, it will be difficult to
prevent or contain future financial crisis spillovers effectively.
While we welcomed greater engagement of emerging economies in the global regulatory
reform process, such as in Basel Committee and various working groups, the key success
factors are these: First, our inclusiveness at the policy development stage rather than just
implementation stage, and secondly, on the inclusiveness in the supervisory colleges of
global banks which are systemically important to our domestic financial system.
Ladies and gentlemen,
In closing, I would like to iterate that, the success in meeting these challenges, rests as much
with us, as with the banking sector. Thus far, we are pleased with their efforts in
strengthening risk management, not only in the process, but more importantly, the culture.
Often, we are asked why our banking system has managed to remain resilient, while those
with more sophisticated risk management system have suffered. I believe the key is, first of
all, there is no gap between the risk profile of our banks and their risk management system,
as well as our risk-based supervision. Our banks business model is less complex, mobilizing
local and stable deposit, for on lending to domestic borrowers, with small investment
portfolios, mostly in plain vanilla Thai government bond. They have very little exposure to
less familiar risk such as overseas assets and complex products.
But looking ahead, things will not stay this safe if both banks and the Bank of Thailand do not
work closely to continuously strengthen risk management. This is because the banking
system must serve the need of the real economy, which will become more complex with
economic globalizations, aging population, and increasing demand from corporate and
households.
Thus, our banking system is interdependent with the real sector, and must evolve with this
awareness, recognition, and impending responsibility.
Thank you for your attention.