The Thai central bank has amended section 19 of the Bank of Thailand Act to clearly state that financial institutions must be mutually responsible in shouldering the costs incurred from bailing out financially ailing peers in the future.
The amended law, which has been approved by the cabinet, will replace a transitional provision of the Bank of Thailand Act 2008, which expired in 2012 and created a loophole in rescuing beleaguered financial institutions in times of crisis.
"When there's no written law to guide what to do when a crisis happens, people usually has an implicit understanding that the government will bail out troubled financial institutions," Bank of Thailand governor Veerathai Santiprabhob said, without revealing when the amended law will come into force.
"We don't want to create a problem of moral hazard and wrong incentive, so we drafted a clearer instruction of how stakeholders should do when crisis erupts," he said.
Under the amended law, the government will be the second source of funding if a financial institution's problems are likely to snowball into a crisis beyond the institution's ability to handle, he said.
"In this way financial institutions will take care of one another by not letting any institution to be involved in activities that could cause risk to the system," Mr Veerathai said.
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Commercial banks' current contribution of 0.47% of deposits will be transformed to be the source of the bailout funding after the Financial Institutions Development Fund's (FIDF) debt, incurred from rescuing financial institutions during the 1997 financial crisis, is paid off.
Banks are now taxed 0.47% of their deposits, of which 0.46% goes to repay the rescue fund's debt of more than 1 trillion baht, and the remaining 0.01% goes to the Deposit Protection Agency.
The FIDF has estimated that the debt incurred from bailing out troubled financial institutions during the 1997 financial crisis would be repaid in less than 15 years, instead of the 24 years previously scheduled.
Mr Veerathai said the amended law will also shorten the decision-making process in throwing a lifeline to troubled financial institutions as it will only need approvals from the cabinet and the Financial Institutions Policy Committee, bypassing the FIDF board as required in the transitional provision.
Somboon Chitphentom, the central bank's assistant governor of the financial institutions policy group, said the Bank of Thailand will require banks to comply with a new liquidity requirement in compliance with the Basel III framework.
The framework's Net Stable Funding Ratio (NSFR), expected to be implemented next year, will strengthen and make financial institutions more balance, he said. The new requirement will be adopted in addition to the Liquidity Coverage Ratio (LCR), which has been in force since 2016.
The LCR has been applied to ensure that financial institutions have adequate high-quality liquid assets that can be converted swiftly into cash without a significant change in value.
Mr Somboon said the NSFR rule can indicate whether the tenor of financial institutions' liabilities match with their assets. "It [NSFR] helps fine-tune [banks] and reflects liquidity better than loan-to-deposit ratio."
Fitch Ratings last week said Thai commercial banks generally have stable funding and robust liquidity -- the average liquidity coverage ratio was 170% in July 2017 -- and it did not expect the implementation of the NSFR to cause challenges.
"Thai financial institutions are now strong. The new requirement is to strengthen them further and ensure that they will always stay strong. Crisis may not happen in the next 10 years but we need to prepare the lifeboat," Mr Veerathai said.
The Bank of Thailand last week also required the country's five largest financial institutions to comply with the higher capital buffer by increasing the common equity Tier 1 ratio requirement and the capital adequacy ratio by 0.5% each in 2019 and 2020.
