The Bank of Thailand (BoT) earlier this week announced that the country's five largest financial institutions are "domestic systemically important banks (D-SIBs)" and that their capital reserves need to be on a par with international standards.
The five banks are Bangkok Bank, Krungthai Bank, Kasikornbank, Siam Commercial Bank and Bank of Ayudhya. All these banks, as per the new rules, are set to comply with the tougher Basel III international standards.
The announcement, which came as a bolt from the blue, initially sent many retail depositors and retail shareholders into panic mode as very few details were available. Retail investors and depositors alike started to fear that there was something wrong with the Thai financial system.
Their fears were not unexpected. After all there have been a growing number of cases of default, especially in small- and medium-sized enterprises (SMEs), and this malaise of rising non-performing loans (NPLs) has started to spread to some bigger firms, as was the case with many defaults seen with Sahaviraya Steel Plc and Pace Development. Reports of many such hidden debt-laden companies have been circulating, but none have emerged into the open yet.
As well as this, the BoT wants these banks to submit to it reporting forms for consolidated supervision more frequently, up from every quarter to every month, starting in 2019. The forms include information such as consolidated capital, liquidity, savings, loans, NPLs, and other information that may have implications for the economy.
These rules therefore pushed alarm bells, prompting many to wonder if the problems had spread out of control or not.
Thai banks, that were once criticised for their role in the 1997 financial crisis, have since been able to sort their acts out and most of them have had their balance sheets cleared of NPLs and dubious loans.
Thai banks at the moment have their capital adequacy ratios at nearly double that of what the Basel III standard is. But that was only publicised at the end of the working day after the panic had rocked the markets.
The BoT itself acknowledged that the Thai banking system's common equity Tier 1 (CET1) ratio stood at 14.62% and the capital adequacy ratio (CAR) was at 17.58% at the end of June, and this was far higher than the international standard. The average for the CET1 ratio for these five-banks stood at 14.25% and the CAR ratio was at 16.93%.
These numbers are far higher than the BoT's current minimum requirements of 5.75% for the CET1 ratio and 9.75% for the CAR ratio, whereas the tougher Basel III standard for the CET1 ratio is a mere 7% at the moment and will rise to 8% by 2020, while that of the CAR ratio is at 11% and will rise to 12% by 2020. These figures that Basel III requires from the Thai financial institutions in just over two years have already been achieved by local financial institutions.
In coming out with the new rules, the BoT created a minor panic which could have been avoided had this information been disseminated ahead of the announcement.
Logic has it that the central bank could have told the public well in advance that it was looking to raise these ratios and that most if not all these banks were already meeting the requirements.
After sending this information out over a period of time, the official announcement could have followed which would have resulted in no panic or questions raised from any sides.
Institutional investors and people who keep track of the banking system were not those in panic mode. Instead it was the general public who formed the backbone of customers who raised questions.
It is therefore advisable for the central bank and other such agencies to think about the impact of their moves and strategise their communication in order to avoid such panics in the future.
