## 1thaea2019001 - 2019. The FSAP findings were discussed with the

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### Executive summary — key findings
- Banks represented 46 percent of total financial assets at end-2018.
- Government-owned SFIs and TCCs play a key role in providing credit to households.
- Assets of the insurance and mutual fund sectors have doubled as a share of GDP over the last decade.
- Capital markets are largely on par with regional peers.
- Financial vulnerabilities appear to be contained, but:
  - Household indebtedness is relatively high.
  - There are signs of weaknesses in some corporates and SMEs.
  - Weaker-than-expected growth in China and advanced economies, sharp rise in risk premia, and entrenched low inflation would adversely impact the financial system.
- Banking sector resilience:
  - Stress tests and sensitivity analysis indicate that the largest banks can withstand a shock broadly as severe as the Asian financial crisis.
- Deposit-taking SFIs:
  - Appear to be vulnerable to asset concentration and interest rate risk (data limited).
- Systemic and contagion risks from interlinkages across banks and nonbanks are limited.
- Data and tools improvements recommended:
  - Improve liquidity and SFI data.
  - Develop tools to assess concentration risk at an entity level.

### Oversight and institutional arrangements — findings and recommendations
- Oversight is generally strong; substantial upgrades since the 2008 FSAP (Appendix I).
- High level of compliance with international standards.
- Independence and accountability:
  - While no objective evidence of lack of independence of supervisory agencies, risks to independence can be mitigated by:
    - Reducing involvement of the MoF in prudential issues.
    - Ensuring each agency has full control over decisions within its responsibilities.
  - Increased independence should be accompanied by enhanced accountability of supervisory agencies to an appropriate legislative body and enhanced cooperation among supervisors.
- Proposed overarching coordination body:
  - Should include representatives of all supervisory agencies, the MoAC, the Deposit Protection Agency (DPA), the Financial Institutions Development Fund (FIDF), and the MoF.
  - Should be created and equipped with power to make recommendations with a “comply or explain” mechanism.
  - Should have no power to issue directions to member agencies.
- Specific structural recommendations:
  - Narrow FIPC membership by removing representatives of the MoF and other supervisory agencies.
  - Shift domestic inter-agency coordination to an overarching FSC outside the BoT with “comply or explain” recommendations and no binding directive power.

### Specific supervisory and regulatory recommendations (selected)
- Oversight of banks:
  - Strengthen loan management practices, the preventive and corrective framework and sanctioning powers, and the AML/CFT regime.
  - Amend Guideline to clarify Chapter 5 of FIBA application and advance PPA application prior to Weak bank status.
- Oversight of SFIs:
  - Establish a neutral regulatory and supervisory framework for commercial banks and SFIs.
  - Prepare a roadmap with milestones for bringing regulation and supervision of the three largest retail-deposit-taking SFIs at par with commercial banks.
- Oversight of TCCs and CUs:
  - Define and initiate implementation of a regulatory and supervisory regime for financial cooperatives proportionally equivalent to that applied in the banking system.
  - Address potential over-indebtedness of members by defining maximum debt-to-income (DTI) ratios and requiring TCCs and CUs to report to the National Credit Bureau (NCB).
- Macroprudential framework:
  - Clearly define roles of the Financial Institution Policy Committee (FIPC) and the Monetary Policy Committee (MPC).
  - Remove requirement for MoF approval of BoT’s macroprudential measures on SFIs.
  - Extend macroprudential measures to cover all relevant institutions and expand tools as needed.
  - Introduce a broad-based DSTI ratio and extend existing DTIs to personal loans granted by SFIs, TCCs, and CUs.
- Crisis management and resolution:
  - Strengthen early warning indicators (EWI) and early intervention arrangements.
  - Develop a resolution toolkit and a framework for resolvability assessments and resolution planning.
  - Review and amend relevant legislation to align resolution powers and safeguards with the Key Attributes.
  - Limit need for government approval for ELA to cases where a government indemnity is requested.
  - Enhance deposit insurance including enabling funding of purchase-and-assumption transactions and establishing a contingent funding line with the MoF or BoT (if the latter, indemnified by the government).

### Financial sector development recommendations
- Funded pension scheme:
  - Revise incentive structure: the Thai system currently offers the same tax benefits to an individual pension plan (retirement mutual plan (RMF)) as to a collective plan (private voluntary provident fund (PVD)), which gives company executives a disincentive to create collective schemes.
  - Revising this incentive structure would help increase participation and meet needs of an aging population.
  - Encourage default investment portfolios, set inflation-linked annuities as default payout option, and limit lump-sum payouts.
- FinTech:
  - Not a financial stability risk at this time.
  - Articulate an overall regulatory strategy.
  - Strengthen supervisory frameworks and capacity as innovation enters the market.
  - Enhance ID infrastructure, competition, data gathering, sandbox operations, product approval, and supervision of innovations.

### Macrofinancial setting and principal risks
- Past resilience supporting factors:
  - Resilience supported by ample international reserves, a flexible exchange rate, and a prudent fiscal position.
- Growth projections and inflation:
  - Economy grew by 4.1 percent in 2018.
  - Projected to slow to around 3.0 percent in 2019 and 2020.
  - Core inflation remains subdued; headline CPI values listed in key indicators.
- Four major macrofinancial risks (Risk Assessment Matrix):
  - (i) weaker-than-expected global growth in key advanced economies and in China;
  - (ii) sharp rise in risk premia;
  - (iii) entrenched low inflation;
  - (iv) debt overhang (household indebtedness elevated).
- Transmission channels noted:
  - Weaker exports and tourism, reversal of capital inflows, Baht depreciation, higher funding costs, increased real debt burden, and constrained consumption.

### Financial system structure and banks
- System composition and market shares:
  - Banks represented 46 percent of total financial sector assets at end-2018 (down from 56 percent in 2007).
  - Five domestic systemically important banks (D-SIBs) account for 70 percent of banks' assets.
  - Five D-SIBs and three IRB banks covered in stress tests representing 75 percent of banking sector assets.
  - Deposit-taking financial institutions (2018): Assets 29,758 bn baht (69 percent of financial assets); Banks 19,997 bn baht (46 percent).
- Bank funding and asset composition:
  - Loans account for around two-thirds of bank assets and 70 percent of liabilities are deposits.
  - Loan-to-deposit ratio slightly below 100 percent.
- Financial soundness indicators (selected):
  - Regulatory capital to risk-weighted assets: 2013 15.5; 2014 16.5; 2015 17.1; 2016 17.8; 2017 18.0; 2018 17.9.
  - NPLs to total gross loans: 2013 2.3; 2014 2.3; 2015 2.7; 2016 3.0; 2017 3.1; 2018 3.1.
  - Return on assets (ROA): 2013 1.8; 2014 1.7; 2015 1.4; 2016 1.4; 2017 1.2; 2018 1.3.
  - Aggregate capital adequacy ratio for commercial banks: above 15 percent over the last decade, peak of 18.5 percent in Q3 2017; regulatory requirement 8.5 percent; no banks below 15.5 percent.
  - Commercial banks' NPLs: 3 percent (down from 8 percent in 2007); ticked up from 2.15 percent in 2014.

### Nonbank financial institutions (NBFIs) and capital markets
- NBFI asset shares:
  - Assets of the main NBFIs reached 61 percent of GDP in 2018 (up from 33 percent in 2007).
  - Insurance companies 3,951 bn baht (9 percent of financial assets); Mutual Funds (incl. MMF) 4,914 bn baht (11 percent); Pension Funds 2,010 bn baht (5 percent).
  - Financial Sector Assets 43,389 bn baht (100 percent); in percent of GDP 266.
- Insurance and mutual funds:
  - Insurance sector well-capitalized, diversified; share of equities high for non-life companies (around 30 percent for non-life).
  - Insurance sector assets in 2017: over 25 percent of GDP, constituting 9 percent of financial sector assets.
- Capital markets:
  - Equity market capitalization reached 99 percent of GDP at end-2018 (market capitalization of the SET in 2017: 96.6 percent of GDP; other figures presented).
  - Domestic bond market dominated by government and central bank paper; corporate bonds represent one quarter of outstanding debt securities.

### Financial vulnerabilities: household, corporate, and SMEs
- Household sector:
  - Household debt to GDP ratio remains among the highest in the region.
  - Household debt stabilized as share of GDP since 2015; hire purchase (auto loans) growth continued in nominal terms.
  - Mortgages NPL ratio gradually edging up; mortgages largely extended to high income individuals earning more than THB 50,000 per month.
- Corporate and SMEs:
  - SMEs represent around 40 percent of GDP and 80 percent of the total labor force.
  - Corporate debt broadly stable as percent of GDP, but profitability of SET-listed companies declined.
  - Share of debt at risk (firms with low interest coverage ratio (ICR)) has increased since 2008 (sample of 459 listed companies with asset size larger than US$25 million).
  - NPL ratio of SMEs increased from 3.5 percent in 2015 to 4.5 percent at end-2018; NPLs high in construction sector.

### Stress testing and resilience — solvency
- Solvency stress tests covered credit, market, funding, and interest rate risks under two common macroeconomic scenarios.
- Exercise covered eight commercial banks (the 5 D-SIBs and the three IRB banks), representing 75 percent of the banking sector assets, with cutoff date end-June 2018.
- Baseline scenario reflects June 2018 WEO projections.
- Adverse scenario:
  - Represents a tail-risk event similar to the 1998 Asian Crisis; cumulative two-year deviation of 15.6 percentage-points with respect to baseline (equivalent to a 2.1 standard deviation shock).
  - Annual GDP growth shocks of -5.6 percent, -2.4 percent, and +4.9 percent over the 3-year horizon (Adverse Scenario macro-path).
  - Comparison: Asian Crisis: 2.4 cumulative std. deviation; Adverse: 2.1 cumulative std. deviation.
- Solvency stress-test results (under adverse scenario):
  - NPL ratios would increase substantially.
  - Most banks would experience significant losses in net income and a decline in capital ratios.
  - Three banks would experience a modest erosion of their capital conservation buffer, which would be easily restored with one-quarter of “normal” profits.
- Hurdle rates for total capital used in the analysis:
  - 8.5 percent for minimum requirement
  - 9.5 percent including D-SIB surcharge
  - 11 percent including capital conservation buffer (CCB)
  - 12 percent including D-Sib surcharge and CCB

### Stress testing — sensitivities, concentration, market and FX risks
- Interest rate risk in the banking book (IRRBB):
  - Six Basel standard scenarios used; no bank would breach the 15 percent Tier 1 capital threshold for EVE impact.
  - All banks remain within existing capital buffers following impact on Net Interest Income (NII).
- Credit concentration and reverse stress testing:
  - Risk of credit concentration is moderate.
  - Reverse stress test indicates default of five largest borrowers would cause two banks to breach Tier 1 requirements; default of top three borrowers would cause one bank to breach requirement.
  - Recommendation: improve analytical approach to concentration risk and develop tools to assess systemic implications.
- Market and FX risk:
  - Market risk moderate for most banks.
  - Historical simulation of FX losses suggests exchange rate risk is small given net open position limits and modest share of FX loans for most banks.
- Residential property risks:
  - Assessment limited by data; estimates point to steady increase in DSTI ratios over past five years across income brackets.

### Liquidity stress tests and funding resilience
- Two frameworks used:
  - (i) severe scenario with outflows of retail deposits, wholesale funds, and mutual funds due to confidence crisis and sharp exchange depreciation;
  - (ii) implied cash-flow-based analysis by maturity bucket from seven days to more than a year.
- NSFR analysis not undertaken due to inadequate NSFR reporting quality.
- Key liquidity results:
  - Banks resilient to large withdrawals despite front-loaded funding maturity structure.
  - Three banks fall below the hurdle rate of 100 percent in the severe scenario; one falls below Basel III transitional threshold of 80 percent.
  - Aggregate liquidity shortfall of 0.7 percent of total assets (1.5 percent of GDP).
  - Two banks have negative cash flow over the “180 days and beyond” window (shortfalls of 6 and 7 percent, respectively, of each bank’s total assets).
  - Aggregate LCR under severe scenario falls to 104 percent; standard and scenario LCR values presented as: 188 104 138 139 174 (figure entries: LCR standard LCR severe LCR retail shock LCR wholesale shock LCR investment funds shock).
  - Simplified SFI liquidity test: all three SFIs can withstand an 11 percent decline in deposits over a five-day period.
- Investment funds (IFs) redemption analysis:
  - Cash positions of open-ended daily fixed income funds and money market funds mostly sufficient under waterfall liquidation.
  - Under pro rata approach, majority retain liquid assets but would require larger sales of government bonds with market impact.
  - Sample covered 72 percent of fixed-income funds or 33 percent of NAV of sector.

### Interconnectedness, contagion, and systemic risk
- Balance-sheet network analysis indicates contagion and systemic risks from interlinkages are limited.
- No failure of a single domestic bank would trigger another bank to fail—absence of a “cascade effect.”
- Contagion among the five largest banks has decreased to the lowest levels in the past 11 years since the GFC.
- Pairwise interconnected measures covering 32 institutions indicate banks generally have a net outward spillover effect.
- Insurance companies generally show weak pairwise interconnectedness with Thai banks, but two insurers exhibit relatively high outward spillovers to the nonbank sector.

### Macroprudential framework, governance, and data
- Financial Stability Unit (FSU) created within the BoT in 2016.
- Macroprudential authority lies primarily with the FIPC.
  - FIPC has full macroprudential powers over commercial banks but needs MoF approval to implement measures related to SFIs.
  - FIPC has no power over TCCs and CUs (regulated by MoAC).
- Recent measures:
  - Maximum DTI ratios on credit cards and personal loans from commercial banks introduced in 2017.
  - Hard limit on LTV introduced in April 2019 (ranging from 70 to 100 percent, depending on property type).
- Effectiveness and leakages:
  - DTI limit effective in slowing loan creation by commercial banks for riskiest categories.
  - DTI limit on personal loans does not apply to SFIs; TCCs and CUs outside scope of LTV and DTI measures.
  - BoT assessing benefits and costs of implementing DTI measures on personal loans to SFIs.

### Financial Market Infrastructures (FMIs) — BAHTNET and TSD findings and recommendations
- BAHTNET:
  - Operated by BoT; RTGS in central bank money; final and irrevocable settlement.
  - Recommendations: prevent participants pledging their own securities as collateral; implement concentration limits; conduct independent review/test of haircut methodology; develop automated collateral management system.
  - Recovery and availability targets: RTO two hours; recovery point objective zero data loss; system availability target 99.9 percent for 2018.
- TSD:
  - Sole CSD and securities settlement system for government securities, corporate bonds, and equities.
  - Recommendations: protect security balances of depositors/customers in event of TSD bankruptcy; establish beneficial ownership rights; strengthen risk management on general business and investment risks, recovery tools, and wind-down plans.
- Recommended authorities’ actions:
  - SEC to increase frequency of onsite examinations of TSD to once in two years and conduct ad-hoc inspections as needed.
  - Authorities to advise FMIs to undertake periodic self-assessments and review them.

### Insurance sector assessment — key findings and recommendations
- Industry metrics and trends:
  - Insurance sector assets grew from 10 percent of GDP in 2006 to over 22 percent of GDP in 2016.
  - Number of authorized insurers at end-December 2018: 82 authorized insurers (58 non-life, 22 life and pension, 2 reinsurance).
  - Insurance penetration ratio increased from 3.63 percent in 2008 to 5.39 percent in 2017.
- Supervisory strengths and gaps:
  - OIC developed qualified supervisory staff, stronger supervisory requirements, risk-based framework, and cross-border cooperation.
  - Areas for improvement: enhance OIC operational independence; appoint commissioners based on technical qualifications; give OIC authority to set fee levels; publish multi-year strategic plan and annual report.
- ICP alignment and recommended actions:
  - Amend primary legislation to vest greater power for key supervisory decisions with the OIC.
  - Strengthen licensing and suitability requirements for significant owners and beneficial owners.
  - Improve RBC by providing for operational and catastrophe risks; move toward RBC2 and consider raising calibration from 95 percent to 99 percent VaR over one year.

### Capital markets and SEC — findings and recommendations
- Key improvements:
  - Amendments to the SEA empowered SEC to bring and enforce civil actions for violations; improved minority shareholder rights; strengthened protection of investor assets; enhanced international cooperation authority.
- Market structure and metrics (selected):
  - 704 companies listed on the SET (545 main board, 159 MAI) (2018).
  - Mutual funds: 1,382 mutual funds with total assets THB 4.68 trillion (US$150 billion).
  - Total outstanding Thai bond market at end-2018: THB 13.06 trillion.
- Surveillance and SRO issues:
  - Real-time surveillance of securities markets is the responsibility of the SRO; SEC lacks direct real-time access to SRO surveillance systems.
  - Recommendation: SEC should obtain real-time online access to SRO surveillance systems and create its own surveillance program.
  - Recommendation: TBMA should revise rules on pre-trade quotes for OTC bond market and require same-day indicative quotes.
- Recommended legal and supervisory reforms:
  - Amend the SEA to transfer final approval on licensing to the SEC and to authorize SEC to bring civil enforcement actions for any violation of the SEA or DA.
  - Develop roadmap for mandatory centralized clearing of OTC derivatives.
  - Consider requiring complete and irreversible dematerialization of all listed securities.
  - SEC to undertake comprehensive review of SET rules on market operations, fees, and trading.

### Thrift and Credit Cooperatives (TCCs) and Credit Unions (CUs)
- Sector significance and vulnerabilities:
  - Financial cooperatives serve over 4 million members and account for 16 percent of household debt.
  - TCCs may mask over-indebtedness of members; low-level NPL indicators may be distorted by priority claims and rollover practices.
  - CUs showed past due loans of 58 percent in 2016 and 26 percent in 2017; past due loans spiked in 2015 to 66 percent due to failure of largest CU.
- Data sharing and safety-net:
  - Cooperatives generally do not share information with the NCB; borrowers’ overall debts not taken into account by other lenders.
  - No deposit insurance coverage for cooperatives; no reliable federation safety-net.
- Recommended strategy:
  - Strengthen prudential soundness of entities in sector; enhance MoAC supervisory capacity with BoT support.
  - Require cooperatives to report members’ debts and repayments to the NCB.
  - Establish liquidity and solvency funds under CPD oversight.
  - Medium-term legal reform to align resolution law to Key Attributes proportionately; consider coverage by deposit insurance and BoT ELA access once standards met.

### Crisis management, resolution, ELA and deposit insurance
- Emergency Liquidity Assistance (ELA):
  - Finding: BoT required by BoTA to obtain approval of the FIPC and Cabinet to provide ELA when financial stability at stake.
  - Recommendation: Amend BoTA to require Ministerial or Cabinet approval only when a government indemnity will be sought; strengthen BoT operational capacity for ELA.
- Deposit Protection Agency (DPA) and resolution funding:
  - Recommendation: Amend law to enable DPA to use its funds for purchase-and-assumption transactions and other forms of resolution (on 'least cost' basis).
  - Recommendation: Establish a formalized funding line with the MoF or BoT (on a government-indemnified basis).
  - Recommendation: Conduct cost-benefit analysis on merger of DPA and FIDF.
- SFIs early intervention and resolution:
  - Align early intervention and resolution frameworks for SFIs broadly with commercial banks.
  - Formalize SFI resolution regime, develop funding arrangement for ELA for SFIs, bring retail deposit-taking SFIs within deposit insurance, and establish resolution plans for SFIs.

### Selected key financial and macroeconomic indicators (exact figures from source)
- Real GDP growth (y/y percent change): 2015 3.1; 2016 3.4; 2017 4.0; 2018 4.1; 2019 2.9; 2020 3.0.
- Headline CPI (end of period): 2015 -0.9; 2016 1.1; 2017 0.8; 2018 0.4; 2019 1.3; 2020 1.2.
- Gross domestic investment (percent of GDP): 2015 22.4; 2016 20.9; 2017 22.8; 2018 25.0; 2019 24.9; 2020 25.3.
- Gross national saving (percent of GDP): 2015 29.3; 2016 31.5; 2017 32.5; 2018 31.4; 2019 31.0; 2020 30.7.
- Current account balance (billions of U.S. dollars): 2015 27.8; 2016 43.4; 2017 44.1; 2018 32.4; 2019 31.8; 2020 30.1.
- Public sector debt (end of period): 2015 42.6; 2016 41.8; 2017 41.9; 2018 42.1; 2019 42.4; 2020 43.0.
- Gross official reserves (end of period, billions of U.S. dollars): 2015 168.2; 2016 197.6; 2017 239.3; 2018 239.4; 2019 251.1; 2020 251.1.
- External debt (Percent of GDP): 2015 32.7; 2016 32.0; 2017 34.1; 2018 31.9; 2019 32.0; 2020 32.4.
- Financial system assets (2018): Financial Sector Assets 43,389 bn baht (100 percent); in percent of GDP 266.
- Deposit-taking financial institutions (2018): Assets 29,758 bn baht (69 percent of financial assets); Banks 19,997 bn baht (46 percent).
- Nonbank financial institutions (2018): Assets 13,630 bn baht (31 percent); Insurance companies 3,951 bn baht (9 percent); Mutual Funds (incl. MMF) 4,914 bn baht (11 percent); Pension Funds 2,010 bn baht (5 percent).
- Gross official reserves as of Q1/2018: US$215 billion representing 51 percent of GDP.
- Financial system assets amount to 259 percent of GDP (June 2018) [selected context figures elsewhere].
- International reserves (Q1/2018) and other summary context provided across the chapter.

### Implementation priorities and timing (selected entries from Table 1)
- Establish an overarching body with a “comply or explain” mechanism (¶15).
  - Responsible: BoT, MoF, OIC, SEC, DPA, FIDF, MoAC
  - Time: NT
- Improve accountability mechanism of the FIPC and the OIC, including hearings to an appropriate legislative body (¶19, 25).
  - Responsible: BoT, OIC
  - Time: MT
- Strengthen independence of regulators by removing representatives of other institutions from the FIPC and boards and removing MoF approval requirements for SFIs (¶19, 21, 25, 28).
  - Responsible: BoT, MoF, OIC, SEC
  - Time: MT
- Enhance data management and capacity for liquidity risk analysis (¶11).
  - Responsible: BoT
  - Time: MT
- Collect more granular data on SFIs to refine stress tests on solvency and liquidity (¶11).
  - Responsible: BoT, MoF
  - Time: NT
- Address potential over-indebtedness by defining maximum DTI ratios and requiring TCCs and CUs to report to the NCB (¶29).
  - Responsible: BoT, MoAC
  - Time: I

(Note: ”I (immediate)” is within one year; “NT (near-term)” is one–three years; “MT (medium-term)” is three–five years.)

*Source: IMF Financial Sector Assessment Program — Thailand (2019).*

### 2019. The FSAP findings were discussed with the

### 1thaea2019001 - 2019. The FSAP findings were discussed with the

### Executive summary — key findings
- Banks represented 46 percent of total financial assets at end-2018.
- Government-owned SFIs and TCCs play a key role in providing credit to households.
- Assets of the insurance and mutual fund sectors have doubled as a share of GDP over the last decade.
- Capital markets are largely on par with regional peers.
- Financial vulnerabilities appear to be contained, but:
  - Household indebtedness is relatively high.
  - There are signs of weaknesses in some corporates and SMEs.
  - Weaker-than-expected growth in China and advanced economies, sharp rise in risk premia, and entrenched low inflation would adversely impact the financial system.
- Banking sector resilience:
  - Stress tests and sensitivity analysis indicate that the largest banks can withstand a shock broadly as severe as the Asian financial crisis.
- Deposit-taking SFIs:
  - Appear to be vulnerable to asset concentration and interest rate risk (data limited).
- Systemic and contagion risks from interlinkages across banks and nonbanks are limited.
- Data and tools improvements recommended:
  - Improve liquidity and SFI data.
  - Develop tools to assess concentration risk at an entity level.

### Oversight and institutional arrangements — findings and recommendations
- Oversight is generally strong; substantial upgrades since the 2008 FSAP (Appendix I).
- High level of compliance with international standards.
- Independence and accountability:
  - While no objective evidence of lack of independence of supervisory agencies, risks to independence can be mitigated by:
    - Reducing involvement of the MoF in prudential issues.
    - Ensuring each agency has full control over decisions within its responsibilities.
  - Increased independence should be accompanied by enhanced accountability of supervisory agencies to an appropriate legislative body and enhanced cooperation among supervisors.
- Proposed overarching coordination body:
  - Should include representatives of all supervisory agencies, the MoAC, the Deposit Protection Agency (DPA), the Financial Institutions Development Fund (FIDF), and the MoF.
  - Should be created and equipped with power to make recommendations with a “comply or explain” mechanism.
  - Should have no power to issue directions to member agencies.

### Specific supervisory and regulatory recommendations (selected)
- Oversight of banks:
  - Strengthen further loan management practices, the preventive and corrective framework and sanctioning powers of supervisors, and the regime for Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT).
- Oversight of SFIs:
  - Establish a neutral regulatory and supervisory framework for commercial banks and SFIs.
  - Prepare a roadmap with milestones for bringing regulation and supervision of the three largest retail-deposit-taking SFIs at par with commercial banks.
- Oversight of TCCs and CUs:
  - Define and initiate implementation of a regulatory and supervisory regime for financial cooperatives that is proportionally equivalent to that applied in the banking system.
  - Address potential over-indebtedness of members by defining maximum debt-to-income (DTI) ratios and requiring TCCs and CUs to report to the National Credit Bureau (NCB).
- Macroprudential framework:
  - Clearly define the roles of the Financial Institution Policy Committee (FIPC) and the Monetary Policy Committee (MPC) to ensure systemic risks are primarily dealt with macroprudential tools.
  - Remove the requirement for approval by the MoF of the BoT’s macroprudential measures on SFIs.
  - Extend macroprudential measures to cover all relevant institutions and expand tools as needed.
- Crisis management and resolution:
  - Strengthen early warning indicators (EWI) and early intervention arrangements.
  - Develop a resolution toolkit and a framework for resolvability assessments and resolution planning.
  - Review and amend relevant legislation to align resolution powers and safeguards with the Key Attributes.
  - Limit need for government approval for emergency liquidity assistance to cases where a government indemnity is requested.
  - Enhance deposit insurance, including enabling funding of purchase-and-assumption transactions and establishing a contingent funding line with the MoF or BoT (if the latter, indemnified by the government).

### Financial sector development recommendations
- Funded pension scheme:
  - Revise incentive structure: the Thai system currently offers the same tax benefits to an individual pension plan (retirement mutual plan (RMF)) as to a collective plan (private voluntary provident fund (PVD)), which gives company executives a disincentive to create collective schemes.
  - Revising this incentive structure would help increase participation and meet needs of an aging population.
- FinTech:
  - Not a financial stability risk at this time.
  - Articulate an overall regulatory strategy.
  - Strengthen supervisory frameworks and capacity as innovation enters the market.

### Table 1 — Key recommendations (selected entries and timing)
- Establish an overarching body to strengthen cooperation, coordination, and information sharing, with a “comply or explain” mechanism (¶15).
  - Responsible: BoT, MoF, OIC, SEC, DPA, FIDF, MoAC
  - Time: NT
- Improve accountability mechanism of the FIPC and the OIC, including hearings to an appropriate legislative body (¶19, 25).
  - Responsible: BoT, OIC
  - Time: MT
- Strengthen independence of regulators by removing representatives of other institutions from the FIPC and boards of regulatory agencies and removing requirements for MoF approval to issue regulation to SFIs and take corrective actions (¶19, 21, 25, 28).
  - Responsible: BoT, MoF, OIC, SEC
  - Time: MT
- Enhance the data management system and improve capacity for liquidity risk analysis (¶11).
  - Responsible: BoT
  - Time: MT
- Extend risk analysis to better cover a wider range of sources of risk with potential systemic spillovers, including concentration in loan portfolios (¶9).
  - Responsible: BoT
  - Time: NT
- Collect more granular data on SFIs to refine stress tests on solvency and liquidity (¶11).
  - Responsible: BoT, MoF
  - Time: NT
- Clarify the financial stability mandate of the FIPC and the MPC (¶19).
  - Responsible: BoT, MoF
  - Time: MT
- Address potential leakages by expanding BoT’s macroprudential authority, including extending existing DTIs to personal loans granted by SFIs, TCCs, and CUs (¶19).
  - Responsible: BoT, MoF, MoAC
  - Time: MT
- Introduce a broad-based DSTI ratio (¶19).
  - Responsible: BoT
  - Time: NT
- Amend internal guidelines on preventive and corrective action to reflect flexibility granted under FIBA (¶21).
  - Responsible: BoT, MoF
  - Time: MT
- Implement new definitions of loan restructuring and rescheduling and current practices surrounding NPL identification to meet international standards (¶22).
  - Responsible: BoT
  - Time: MT
- Continue reforms to supervise the three largest retail deposit-taking SFIs under the same standards as commercial banks (¶24).
  - Responsible: BoT, MoF
  - Time: MT
- Define and initiate the implementation of a regulatory and supervisory regime for financial cooperatives that is proportionally equivalent to that applied to the banking system (¶29).
  - Responsible: MoAC with support from BoT
  - Time: MT
- Address potential over-indebtedness including by defining maximum DTI ratios, and requiring TCCs and CUs to report to the NCB (¶29).
  - Responsible: BoT, MoAC
  - Time: I
- Enhance scope and capacity for risk-based AML/CFT supervision (¶30).
  - Responsible: AMLO
  - Time: MT
- Review and amend bank and SFI resolution law to align with Key Attributes (¶33, 37).
  - Responsible: BoT/MoF
  - Time: MT
- Develop bank and SFI resolution toolkit and implement bank-specific resolution planning (¶34, 37).
  - Responsible: BoT/MoF
  - Time: MT
- Strengthen ELA and deposit insurance arrangements in line with best practice (¶35, 36).
  - Responsible: BoT, MoF, DPA
  - Time: MT
- Improve incentive structure of PVD scheme to focus it on providing adequate pension and encourage lifecycle investment portfolios (¶38).
  - Responsible: MoF, SEC
  - Time: NT

(Note: ”I (immediate)” is within one year; “NT (near-term)” is one–three years; “MT (medium-term)” is three–five years.)

### Macrofinancial setting and risks (high-level)
- Thailand’s economy resilient to several shocks in the last decade: floods in 2011, supply shocks in global commodity markets, and political instability in 2013–14.
- Resilience supported by ample international reserves, a flexible exchange rate, and a prudent fiscal position.
- Growth:
  - Economy grew by 4.1 percent in 2018.
  - Projected to slow to around 3.0 percent in 2019 and 2020.
- Inflation:
  - Core inflation remains subdued.
  - Average headline inflation (text truncated in source).

*Source: IMF Financial Sector Assessment Program — Thailand (2019).*

### 1.1 percent in 2018) is projected to decline to just below the lower end of BoT's target band of

### 1thaea2019001 - 1.1 percent in 2018) is projected to decline to just below the lower end of BoT's target band of

### Financial system structure and banks
- Banks represented 46 percent of total financial sector assets at end-2018 (down from 56 percent in 2007).
- Five domestic systemically important banks (D-SIBs) account for 70 percent of banks' assets.
- The sector appears to be sound (Figures 2 and 3, and Table 4).
- Assets of SFIs and other deposit-taking institutions grew faster than banks’ assets.
- SFIs' average nonperforming loan (NPL) ratio was 4.5 percent as of September 2017.
- Banks continue to rely mostly on retail deposits for funding; loans account for around two-thirds of bank assets and 70 percent of liabilities are deposits, with a loan-to-deposit ratio slightly below 100 percent.

### Financial soundness indicators (high-level findings)
- Capital adequacy ratio remains well above the regulatory minimum and increasing.
- NPL ratio is low, though quality of credit to SMEs is showing signs of deterioration.
- Share of liquid asset to total asset is moderately below the median of peer countries.
- Thai banks appear to rely more on short-term liabilities.
- Profitability is somewhat below peer countries.
- Insurance sector: diversified asset allocation, but share of equities is high for non-life companies (around 30 percent for non-life).

### Nonbank financial institutions (NBFIs) and capital markets
- Assets of the main NBFIs reached 61 percent of GDP in 2018 (up from 33 percent in 2007).
- Insurance and mutual fund sectors have doubled as a share of GDP in the last decade.
- Insurance sector is well-capitalized, diversified, and has shifted away from endowment products in response to low-interest rates; however, profitability has been weakening due to rising costs and competition and investments in riskier assets have increased.
- Equity market capitalization reached 99 percent of GDP at end-2018.
- Domestic bond market is dominated by government and central bank paper; corporate bonds represent one quarter of outstanding debt securities and are mostly investment-rated, baht-denominated and held by domestic retail and institutional investors.
- Retail clients dominate mutual funds; roughly half of funds are fixed income; shares of equity and infrastructure funds have increased recently.
- Foreign investment funds account for about one-fifth of total asset under management (AUM).
- The largest five asset management companies, accounting for 70 percent of AUM, are all part of bank conglomerates.

### Financial vulnerabilities: household, corporate, and SMEs
- Household debt to GDP ratio remains among the highest in the region, despite a moderate decline in recent years.
- The pickup in household debt through 2013 was driven by personal loans and hire purchase (mainly autos), with one-off factors including the 2011 floods and the first car tax rebate scheme.
- Housing prices have risen sharply in areas of Bangkok, especially condominium prices backed by increased foreign purchases; broader housing market increase has been moderate compared to regional peers.
- SMEs represent around 40 percent of GDP and 80 percent of the total labor force.
- Corporate debt has been broadly stable as a percent of GDP over the past decade, but profitability of SET-listed companies on average has declined.
- Share of debt at risk (debt of firms with low interest coverage ratio (ICR)) has increased since 2008 (based on a sample of 459 listed companies with asset size larger than US$25 million).
- NPL ratio of SMEs increased from 3.5 percent in 2015 to 4.5 percent at end-2018; NPLs are particularly high in the construction sector (but remain below levels seen ten years ago).
- Given the strong capital position of banks, vulnerabilities emerging in SMEs are unlikely to have a significant impact on banking system stability.

### Household sector details
- Household debt as a share of GDP stabilized since 2015, but in nominal terms household debt continued to grow driven by hire purchase (auto loans).
- Growth in hire purchase (auto loans) accelerated in recent months; contribution to personal loan growth is shifting towards nonbank institutions.
- Recent pick-up in credit demand supported by favorable labor market developments: labor force, employment, and average real wage trends noted (figures provided).
- NPL ratio of mortgages has been gradually edging up; mortgages largely extended to high income individuals earning more than THB 50,000 per month.

### Corporate sector details
- Corporate profitability has been on the decline since the 2008–2009 Global Financial Crisis (EBIT to total assets trend illustrated).
- Leverage has increased substantially in sectors such as real estate, utilities, and some manufacturing (change in leverage since last FSAP and leverage by industry shown).
- Debt held by Thai corporates with ICR less than 1 has increased somewhat and remains relatively high.
- Number of firms with ICR less than 1 for three consecutive years has increased.
- Corporate bond market growing rapidly with issuance across sectors.
- NPLs are larger in SMEs than in large companies.

### Financial sector stability and resilience — risks and stress testing
- Four major macrofinancial risks identified in the Risk Assessment Matrix (RAM): (i) weaker-than-expected global growth in key advanced economies and in China, (ii) sharp rise in risk premia, (iii) entrenched low inflation, and (iv) debt overhang.
- Political uncertainty could precipitate equity price collapse, sharp exchange rate depreciation, and funding pressures.
- FSAP team assessed resilience of banking system and investment funds (IFs) and conducted basic risk analysis of SFIs under stress tests (Appendix II).
- Solvency stress tests:
  - Parallel solvency stress tests covered credit, market, funding, and interest rate risks under two common macroeconomic scenarios.
  - Exercise covered eight commercial banks (the 5 D-SIBs and the three IRB banks), representing 75 percent of the banking sector assets, with cutoff date end-June 2018.
  - Baseline scenario reflects the June 2018 World Economic Outlook (WEO) macroeconomic projections (Table 6).
  - Adverse scenario represents a tail-risk event and captures key macrofinancial risks in the RAM; assumes a significant slowdown similar to the experience during the 1998 Asian Crisis and is consistent with Growth-at-Risk (GaR) estimates.
  - It is assumed the central bank would privilege restoring growth—by cutting the policy rate—over defending the currency, given the high level of international reserves and current account surplus (and likely fall of imports in the adverse scenario).
- Scenario comparison (Figure 8):
  - Asian Crisis: 2.4 cumulative std. deviation.
  - Adverse: 2.1 cumulative std. deviation.

*Source: IMF staff and Bank of Thailand data as presented in the specified PDF content.*

### 8.      The results suggest resilience of the banks covered by the exercise to the adverse

### 8.      The results suggest resilience of the banks covered by the exercise to the adverse

### Solvency stress-test results (banks and SFIs)
- Under the adverse scenario:
  - NPL ratios would increase substantially.
  - Most banks would experience significant losses in net income and a decline in capital ratios.
  - Three banks would experience a modest erosion of their capital conservation buffer, which would be easily restored with one-quarter of “normal” profits.
- Exploratory solvency stress tests on SFIs indicate:
  - An important vulnerability under the adverse scenario for certain SFIs due to limited asset diversification.
  - The impact could be largely absorbed by high provisioning.
  - Collecting more granular data on SFIs is key to refine the exercise.
- Hurdle rates for total capital used in the analysis:
  - 8.5 percent for minimum requirement
  - 9.5 percent including D-SIB surcharge
  - 11 percent including capital conservation buffer (CCB)
  - 12 percent including D-Sib surcharge and CCB

### Sensitivity tests: interest rate risk, concentration, market and FX risks
- Interest rate risk in the banking book (IRRBB):
  - Six Basel standard scenarios used, including parallel shocks, steepener, flattener, and short-rate concentrated shocks.
  - No bank would breach the 15 percent Tier 1 capital threshold for the impact on the Economic Value of Equity (EVE).
  - All banks remain within existing capital buffers following the impact on Net Interest Income (NII).
  - Parallel shocks: EVE impact (in terms of Tier 1 capital) is within the suggested threshold (-15 percent) for all banks.
  - For NII, parallel shocks cause impacts of different sign across banks, but all impacts are within the size of existing capital surplus above requirements/buffers.
- Credit concentration and reverse stress testing:
  - The risk of credit concentration is moderate.
  - Reverse stress test indicates the default of the five largest borrowers would cause two banks to breach the Tier 1 requirements.
  - The default of the top three borrowers would cause one bank to breach the required threshold.
  - Recommendation: improve analytical approach to concentration risk, including developing analytical tools to assess implications on systemic risk.
- Market and FX risk:
  - Market risk is moderate for most banks.
  - Historical simulation of foreign exchange (FX) losses suggests exchange rate risk is small, partly reflecting net open position limits.
  - Indirect FX risk likely low given the modest share of FX loans for most banks.
- Residential property risks:
  - Difficult to assess due to limited data.
  - FSAP team’s estimates point to a likely steady increase in debt service-to-income (DSTI) ratios in the past five years across all income brackets.
  - SFIs’ exposure to interest rate risks appears to be significant.

### Liquidity stress tests and funding resilience
- Frameworks and scope:
  - Two frameworks: (i) severe scenario with outflows of retail deposits, wholesale funds, and mutual funds due to a confidence crisis and sharp exchange depreciation; (ii) implied cash-flow-based analysis by maturity bucket from seven days to more than a year, with higher run-off rates in the LCR analysis.
  - NSFR analysis not undertaken due to inadequate quality of NSFR reporting (began only in September 2018).
  - Tests conducted in baht; banks are not required to report FX positions unless they have a significant FX position.
- Key results:
  - Banks are resilient to large withdrawals despite front-loaded funding maturity structure.
  - Three banks fall below the hurdle rate of 100 percent in the severe scenario; one of these falls below the Basel III transitional threshold of 80 percent.
  - Aggregate liquidity shortfall of 0.7 percent of total assets (1.5 percent of GDP).
  - Cash-flow-based analysis broadly consistent with LCR test over a one-month horizon.
  - All but two banks have a positive funding over all time horizons.
  - Two banks would have a negative cash flow over the “180 days and beyond” window (shortfalls of 6 and 7 percent, respectively, of each bank’s total assets).
  - Recommendation: enhance data management for liquidity risk to ensure availability of more granular maturity-decomposed balance-sheet data.
- Simplified SFI liquidity test:
  - All three SFIs have sufficient liquidity to withstand an 11 percent decline in deposits over a five-day period.
  - More granular data needed to refine SFI liquidity assessment.
- Aggregate LCR and component results (as presented):
  - The aggregate LCR under the severe scenario falls to 104 percent.
  - The counterbalancing capacity is used in the “1–7 day” window and “more than 180 days” window due to large proportion of sight deposits and other liabilities.
  - The aggregate LCR under the severe scenario, which combines shocks to retail, wholesale and investment funds’ deposits, remains above the hurdle rate of 100 percent.
  - (Figure/table entries as presented: LCR standard LCR severe LCR retail shock LCR wholesale shock LCR investment funds shock — values shown in figure: 188 104 138 139 174)
  - Liquidity shortfall (as presented): THB billion...24824.753.70; Percent of GDP...1.50.20.30.0; Percent of banks' assets in sample...0.70.20.40.0
  - Number of banks failing to meet regulatory/hurdle rates (as presented): examples shown in figure (e.g., 1 out of 8, 3 out of 8).
- Investment funds (IFs) redemption analysis:
  - Cash positions of open-ended daily fixed income funds and money market funds mostly sufficient to meet redemptions when assuming waterfall liquidation of most liquid assets.
  - Under pro rata approach (maintaining asset structure), majority of IFs retain a good amount of liquid assets but would require more aggressive sales of government bonds with larger bond market impact.
  - Credit lines between banks and asset management companies provide an additional liquidity buffer.
  - Sample covered 72 percent of fixed-income funds or 33 percent of net asset value of the sector.

### Interconnectedness, contagion, and systemic risk
- Balance-sheet network analysis (Espinoza-Vega and Solé (2010) methodology):
  - Contagion and systemic risks from interlinkages are limited, reflecting small interbank exposures and strong capital positions.
  - No failure of a single domestic bank would trigger another bank to fail—absence of a “cascade effect.”
  - Banks’ cross-border exposures are small, except where specific banks have strong parent relationships (e.g., Bank 11 in the figures).
  - Inter-sectoral exposures limited except for nonfinancial corporate sector (primarily through FDIs).
  - Aggregate capital buffer impacts from extreme shocks are manageable.
- Market-data measures:
  - Contagion among the five largest banks has decreased to the lowest levels in the past 11 years since the GFC.
  - Pairwise interconnected measures covering 32 institutions indicate banks generally have a net outward spillover effect.
  - Insurance companies generally show weak pairwise interconnectedness with Thai banks, but two insurers exhibit relatively high outward spillovers to the nonbank sector.
  - Joint default probability and spillover coefficients peaked during the GFC and have since declined, with insurance sector tensions reemerging in 2012 before subsiding.

### Institutional arrangements and policy recommendations
- Establish an overarching Financial Stability Committee (FSC) to strengthen cooperation, coordination, and information sharing among agencies:
  - The FSC should be outside the BoT.
  - Membership should include supervisory agencies, the MoAC, the DPA, the FIDF and the MoF represented by the head of the agency and a nominated deputy.
  - The FSC would provide a forum for regular exchange of information and coordination on all financial sector policy and regulatory issues and be the primary coordination body in a financial crisis.
  - The FSC would not have binding powers but would have the power to issue recommendations with a “comply or explain” mechanism over all member regulators to reduce inaction bias while preserving operational independence.
  - There should be a transparent process for issuing recommendations and for regulators to explain non-compliance.
  - The functions and powers of the FSC, responsibilities of each member, and the FSC’s obligation to publish annual reports should be established in law.
- Address potential conflicts and accountability:
  - The FIPC (internal BoT committee) includes OIC, SEC, five independent external appointees, and the MoF.
  - The MoF’s ownership of SFIs and several large commercial banks creates a conflict of interest in FIPC decisions and could weaken MoF’s ability to perform objective ex post assessments.
  - Presence of SEC and OIC in FIPC can potentially dilute accountability and delay decisions.
  - Recommendation: narrow FIPC membership and shift domestic inter-agency coordination to the FSC to address these challenges.
- Data and analytical capacity recommendations:
  - Collect more granular data on SFIs to refine solvency and liquidity exercises.
  - Enhance data management for liquidity risk (detailed balance-sheet decomposition by maturity).
  - Improve analytical tools to assess concentration risk and its systemic implications.

*Source: IMF staff and Bank of Thailand analysis as presented in the FSAP chapter excerpt.*

### 17.      Significant progress has been made on the macroprudential framework and policies in

### 1thaea2019001 - 17.      Significant progress has been made on the macroprudential framework and policies in

### Macroprudential framework, governance, and data
- The Financial Stability Unit (FSU) was created within the BoT in 2016.
- Macroprudential authority lies primarily with the FIPC.
- The FIPC:
  - Has full macroprudential supervisory and regulatory powers over commercial banks.
  - Needs approval of the MoF to implement macroprudential measures related to SFIs.
  - Does not have any power over TCCs and CUs (regulated by the MoAC).
- The OIC and the SEC also play a key role in macroprudential policy.
- BoT systemic risk analysis and monitoring are solid but could be improved with better data, including:
  - dynamic information on borrowers’ characteristics and LTV ratios,
  - data on TCCs and CUs.
- Market-based connectedness findings:
  - The spillover analysis reveals a fairly balanced network, with no entity strongly dominating.
  - Spillovers are now less pronounced than in the past.

### Recent macroprudential measures, effectiveness, and leakages
- Measures and timing:
  - Maximum DTI ratios on credit cards and personal loans from commercial banks were introduced in 2017.
  - A hard limit on LTV was introduced in April 2019 (ranging from 70 to 100 percent, depending on the type of property).
- Effectiveness:
  - The DTI limit seems to have been effective in slowing loan creation by commercial banks for the riskiest categories of loans.
  - NPL ratios on credit cards reached the highest in 2016, and declined after the introduction of the new credit limit.
  - NPL ratios for (unsecured) personal loans provided by banks have also declined.
- Impact and coverage:
  - The LTV limit will likely affect around 30 percent of borrowers.
  - Out of the 30 percent of borrowers:
    - about 20 percent will need to increase their down payments to meet the LTV restriction of 100 percent;
    - the remaining 10 percent of borrowers will need to reduce their LTV further to meet the tighter restrictions applied to certain types of properties.
  - Foreign buyers are not allowed to borrow domestically, and can only purchase condominiums (accounting for 20–30 percent of the condominium market).
- Housing market trend:
  - Housing prices have increased by 3.9–6.4 percent per year (depending on the type of property), on average, over the last 10 years.
- Leakages and gaps:
  - DTI limit on personal loans does not apply to SFIs.
  - TCCs and CUs are outside the scope of LTV and DTI measures.
  - There is only one SFI that issues credit card loans; in November 2017 the BoT asked this institution to comply with the DTI on credit card loans. This institution-by-institution regulation for SFIs may facilitate leakages and will need to be revised if other SFIs start engaging in credit card lending.
  - The BoT is assessing the benefits and costs of implementing DTI measures on personal loans to SFIs.

### Recommendations to strengthen macroprudential framework and toolkit
- Amend BoTA to:
  - narrow the membership of the FIPC by removing representatives of the MoF and other supervisory agencies;
  - provide the FIPC with a clear macroprudential mandate and clarify that the MPC could have financial stability as a secondary objective (price stability remains primary);
  - reinforce the accountability mechanism for the FIPC to include hearings to an appropriate legislative body.
- Enhance the macroprudential toolkit:
  - Ensure that all macroprudential tools are applied to SFIs (preferably by amending the Financial Institutions Business Act (FIBA)).
  - Ensure BoT macroprudential regulations cover TCCs and CUs when relevant, without requiring approval of external institutions (including by amending the BoTA and the Cooperatives Act).
  - Impose an aggregate DSTI limit covering all loans to consumers and extend existing DTIs to personal loans granted by SFIs, TCCs, and CUs.

### Banks and Specialized Financial Institutions (SFIs)
- Commercial bank supervision:
  - The enactment of the FIBA in 2008 established the BoT as sole supervisor of commercial banks, empowered it to issue regulations and undertake corrective action without MoF approval, and strengthened consolidated supervision and enforcement authority of conglomerates.
  - The BoT’s supervisory framework and practices provide the foundation for the continued development of risk-based supervision.
- Further enhancements recommended:
  - Align corrective action requirements under FIBA and BoT internal guideline requirements on prompt preventive action (PPA) and prompt corrective action (PCA) to emphasize FIBA-granted flexibility.
  - Narrow criteria for notifying the MoF of corrective action to situations of systemic impact or bank failure.
  - Strengthen operational independence of the BoT; the BoT’s negative net worth could make it vulnerable to political interference.
  - Narrow the membership of the FIPC and eliminate Cabinet approval requirement for ELA and bank resolution decisions unless government funding or indemnities are needed.
- Asset classification and loan management:
  - Definitions of loan restructuring and rescheduling and current practices around NPL identification are weaker than international standards.
  - BoT supervisors have issued a regulation to be implemented once IFRS 9 becomes effective in 2020.
  - High provisioning levels and in-depth BoT supervisory procedures mitigate some shortcomings.
- SFI supervision:
  - Regulatory framework for SFIs is complex, with responsibilities divided between the MoF and the BoT.
  - Supervision and regulation of SFIs were transferred to the BoT in 2015.
  - The BoT needs approval of the MoF to issue regulations related to SFIs and to take corrective actions, constraining BoT operational independence.
  - Recommendation: bring the three largest retail deposit-taking SFIs under regulation and supervision at par with commercial banks; implement a road map with milestones to facilitate transition over 3–5 years.
  - If insufficient progress in the next three to five years, consider transferring supervision of cooperatives to the BoT or to a new institution with relevant expertise and supervisory powers.

### Insurance
- Progress over past decade:
  - Development of qualified and effective supervisory staff, stronger supervisory requirements, an effective risk-based supervisory framework, and enhanced information exchange and cross-border cooperation.
- Areas for additional improvement:
  - Enhance operational independence of the OIC:
    - The MoF should not be allowed to override any decision of the OIC.
    - All commissioners should be appointed based on technical qualifications rather than their positions in other government organizations.
    - The OIC, rather than the Minister, should be given authority to set fee levels on the industry.
  - Develop the accountability framework:
    - Publish a multi-year strategic plan and an annual report to report progress in meeting goals and objectives.
  - Update licensing and suitability requirements:
    - Ensure clarity, consistency, and timeliness of licensing decisions and procedures.
    - Strengthen suitability requirements for all real-person beneficial owners of insurers, including identification and assessment of financial capability and integrity.

### Financial Market Infrastructures (FMIs)
- FMIs in place:
  - BAHTNET: the BoT-operated real-time interbank gross payment and settlement system.
  - TSD: the sole central securities depository and the securities settlement system for government securities, corporate bonds, and equities (fully owned subsidiary of the SET).
- Recommended improvements:
  - BAHTNET:
    - Prevent participants from pledging their own securities as collateral.
    - Implement concentration limits.
    - Conduct independent review and test of the haircut methodology.
    - Develop an automated collateral management system.
  - TSD:
    - Protect security balances of depositors and customers in the event of TSD bankruptcy.
    - Establish beneficial ownership rights of securities balances of depositors and investors.
    - Strengthen risk management on general business and investment risks, recovery tools, and wind-down plans.

### Capital Markets
- Improvements since last FSAP:
  - Amendments to the Securities and Exchange Act (SEA) empowered the SEC to bring and enforce civil actions for violations, improved rights of minority shareholders, strengthened protection of investor assets held by a failed securities company, and provided SEC greater authority to cooperate with foreign regulators.
- Further recommendations:
  - Enhance operational independence and authority of the SEC:
    - Amend the SEA to enable the SEC to institute civil proceedings for any violation of the SEA or of SEC regulations.
    - Transfer final authority to approve and revoke licenses from the MoF’s Capital Market Supervisory Board to the SEC.
  - Conduct a comprehensive review of SET rules on market operations, fees, and trading.
  - Improve transparency in the OTC bond market and develop a roadmap for mandatory centralized clearing of OTC derivatives contracts (SEC and BoT).

### Thrift and Credit Cooperatives (TCCs) and Credit Unions (CUs)
- Priority recommendations:
  - Define and initiate a regulatory and supervisory regime for financial cooperatives that is proportionately equivalent to that applied to the banking system.
  - In the medium-term, MoAC should separate regulation and supervision from its promotion function and ensure independence of regulation and supervisory functions.
  - Institutionalize collaboration between the BoT and the MoAC; strengthen regulatory and technological capacities and enforcement powers of relevant MoAC departments.
  - Require financial cooperatives to report members’ debts and repayments to the NCB to determine actual level of debt of cooperative members.
  - Enhance supervisory capacity of MoAC in collaboration with the BoT and MoF to adopt recommended macroprudential measures to cooperatives.
  - If insufficient progress in 3–5 years, consider transferring supervision of cooperatives to the BoT or to a new institution with relevant expertise.

### AML/CFT
- Asia Pacific Group 2017 mutual evaluation shortcomings are being addressed; further work needed to enhance effectiveness:
  - Require that lawyers are covered under the AML/CFT framework.
  - Verify beneficial owners without the need to determine presence of ML/TF risks.
  - Identify source of wealth of politically exposed persons (PEPs).
  - Require financial institutions to report suspicions of ML/TF on transactions between government entities.
  - Continue to enhance AMLO capacity for AML/CFT supervision, especially in the financial sector, and target resources at risks.
  - Ensure sanctions for AML/CFT violations are dissuasive and proportionate.
  - Pursue TF and proliferation financing investigations.

### Crisis management and resolution
- Legal and institutional features:
  - The crisis management framework has many features needed to manage bank distress and failure.
  - Legal powers for dealing with emerging stress in banks are robust; BoT has policies and systems to identify and respond to bank stress.
  - Laws need improvement on clarity of resolution objectives, triggers, powers, and safeguards; a comprehensive review of BoTA and FIBA is encouraged to better align with international Key Attributes.
- Early warning indicators (EWIs) and PPA/PCA:
  - Develop additional EWIs for individual banks linked to more comprehensive triggers for PPA, PCA, and banks’ recovery plans.
  - Existing triggers for PPA and PCA are based on BoT supervisory ratings and occur at relatively advanced stages of deterioration; revise PPA and PCA frameworks to set triggers at earlier stages.
  - Contingency plans should be developed and tested regularly by the BoT.
  - D-SIBs have developed recovery plans; other locally incorporated banks are required to develop recovery plans by June 2020.
- Resolution framework improvements:
  - Move responsibility for resolution decision-making from the FIPC to a body within the BoT (without external members) to ensure BoT operational independence, facilitate prompt decision-making, and avoid dilution of institutional accountability.
  - Vest resolution functions in the BoT, with the Financial Institution Development Fund (FIDF) only responsible for resolution funding.
  - If the BoT provides funding to the FIDF, do so only under a formal indemnity from the government.
  - Develop comprehensive bank resolution guidance within the BoT and across other agencies.
  - Develop policy frameworks for resolvability assessments and prepare resolution plans for at least the D-SIBs.
  - Strengthen cross-border cooperation arrangements for bank recovery and resolution with home authorities of foreign banks in Thailand.

*Source: IMF staff summary of chapter content.*

### 35.      The ELA arrangements should be strengthened to avoid risks of delays in

### 1thaea2019001 - 35.      The ELA arrangements should be strengthened to avoid risks of delays in

### Emergency Liquidity Assistance (ELA): findings and recommendations
- Finding: Under current arrangements, the Bank of Thailand (BoT) is required by the BoTA to obtain approval of the FIPC and Cabinet to provide ELA in situations where the stability of the financial system is at stake.  
- Risk: Involvement of government in ELA creates significant risks for the effective operation of ELA and exacerbates moral hazard, including the presumption of taxpayer-funded bail-out of banks in distress.  
- Recommendation: Amend the BoTA to require the BoT to obtain Ministerial or Cabinet approval to provide ELA only when there is a high possibility that government indemnity will be sought (noting it may be difficult in some circumstances for the BoT to assess upfront whether a government indemnity is needed).  
- Recommendation: Strengthen the BoT’s operational capacity for providing ELA.

### Deposit Protection Agency (DPA) and resolution funding
- Recommendation: Amend the law to enable the DPA to use its funds for purchase-and-assumption transactions and other forms of resolution (on a 'least cost' basis).  
- Recommendation: Establish a formalized funding line with the MoF or the BoT (on a government-indemnified basis).  
- Recommendation: Conduct a cost-benefit analysis over the medium-term on the merger of the DPA and FIDF, given the parallels in their respective functions.

### Specialized Financial Institutions (SFIs): early intervention and resolution
- Finding: The BoT has the power to require preventive or corrective actions of an SFI but only with the approval of the MoF.  
- Gaps: Policies and procedures for early intervention and resolution for SFIs are lacking, including recovery planning; there is no established resolution regime for SFIs.  
- Recommendations:
  - Align early intervention and resolution frameworks for SFIs broadly with those for commercial banks.
  - Formalize the resolution framework of SFIs.
  - Develop a funding arrangement for ELA for SFIs.
  - Bring retail deposit-taking SFIs within the deposit insurance scheme.
  - Establish resolution plans for SFIs.

### Funded pension scheme: problems and policy options
- Finding: The private, funded pension system is inadequate to meet the needs of an aging population; incentives lead to low participation and suboptimal investment allocations.  
- Specific issues:
  - The Thai system offers the same tax benefits to an individual pension plan (RMF) as to a collective plan (PVD), giving company executives a disincentive to create collective schemes, resulting in low participation in collective, private PVDs.
  - AMCs and fund committees have limited incentives to pursue optimal investment strategies, leading to overly conservative investments and inadequate pensions for retirees.
  - The payout phase of the PVD scheme includes incentives for participants to take lump-sum payouts at retirement, raising significant risk of old-age poverty.
- Recommendations:
  - Revise the incentive structure to favor collective PVD plans over individual plans.
  - Encourage default investment portfolios that provide adequate pensions.
  - Set inflation-linked annuities as the default payout option.
  - Limit lump-sum payouts.

### FinTech: opportunities and supervisory implications
- Finding: An active FinTech ecosystem is bringing opportunities and regulatory/supervisory challenges; proliferation of new payments companies (e-money wallet and card program operators) and instruments (e.g., PromptPay QR payments).  
- Assessment: FinTech does not present a financial stability risk at this time, but robust monitoring is needed as digital financial services can rapidly change risk profiles.  
- Recommendation: Articulate an overall regulatory strategy and update/strengthen supervisory frameworks and capacity to monitor risks and reallocate supervisory resources as innovation enters the market.  
- Areas for further enhancement: ID infrastructure, competition, data gathering, sandbox operations, product approval, and supervision of innovations (Appendix IV).

### Key financial and macroeconomic indicators (selected exact figures from source)
- Real GDP growth (y/y percent change): 2015 3.1; 2016 3.4; 2017 4.0; 2018 4.1; 2019 2.9; 2020 3.0 (Prel. indicated elsewhere).  
- Headline CPI (end of period): 2015 -0.9; 2016 1.1; 2017 0.8; 2018 0.4; 2019 1.3; 2020 1.2.  
- Gross domestic investment (percent of GDP): 2015 22.4; 2016 20.9; 2017 22.8; 2018 25.0; 2019 24.9; 2020 25.3.  
- Gross national saving (percent of GDP): 2015 29.3; 2016 31.5; 2017 32.5; 2018 31.4; 2019 31.0; 2020 30.7.  
- Current account balance (billions of U.S. dollars): 2015 27.8; 2016 43.4; 2017 44.1; 2018 32.4; 2019 31.8; 2020 30.1.  
- Public sector debt (end of period): 2015 42.6; 2016 41.8; 2017 41.9; 2018 42.1; 2019 42.4; 2020 43.0.  
- Gross official reserves (end of period, billions of U.S. dollars): 2015 168.2; 2016 197.6; 2017 239.3; 2018 239.4; 2019 251.1; 2020 251.1.  
- External debt (Percent of GDP): 2015 32.7; 2016 32.0; 2017 34.1; 2018 31.9; 2019 32.0; 2020 32.4.  
- Financial system assets (2018): Financial Sector Assets 43,389 bn baht (100 percent); in percent of GDP 266.  
- Deposit-taking financial institutions (2018): Assets 29,758 bn baht (69 percent of financial assets); Banks 19,997 bn baht (46 percent).  
- Nonbank financial institutions (2018): Assets 13,630 bn baht (31 percent); Insurance companies 3,951 bn baht (9 percent); Mutual Funds (incl. MMF) 4,914 bn baht (11 percent); Pension Funds 2,010 bn baht (5 percent).  
- Financial Soundness Indicators (2013–2018 highlights):
  - Regulatory capital to risk-weighted assets: 2013 15.5; 2014 16.5; 2015 17.1; 2016 17.8; 2017 18.0; 2018 17.9.
  - NPLs to total gross loans: 2013 2.3; 2014 2.3; 2015 2.7; 2016 3.0; 2017 3.1; 2018 3.1.
  - Return on assets (ROA): 2013 1.8; 2014 1.7; 2015 1.4; 2016 1.4; 2017 1.2; 2018 1.3.

### Risk Assessment Matrix: principal risks and transmission
- Global Risks:
  - Background 1: Weaker-than expected global growth — Relative likelihood High/medium; Impact: Medium. Transmission: weaker exports and tourism, higher corporate vulnerabilities, pressure on household repayment capacity, potential rise in NPLs and provisioning needs for banks.
  - Background 2: Sharp rise in risk premia — Relative likelihood High; Impact: High. Transmission: reversal of capital inflows, Baht depreciation, higher funding costs, pressure on bank profitability, stress on unhedged FX borrowers.
- Domestic Risks:
  - Background 3: Entrenched low inflation — Relative likelihood Medium; Impact: High. Transmission: increased real interest rates and real debt burden, risks to balance sheets, search for yield leading to excessive risk-taking.
  - Background 4: Debt overhang (household indebtedness elevated) — Relative likelihood Medium; Impact: Medium. Transmission: constrained consumption, potential bank losses, contraction in credit.

### Macroeconomic scenario projections (selected exact figures)
- Table 6 (2018–2021, Baseline and Adverse deviations):
  - Real GDP growth (baseline series shown): 2018 4.6; 2019 3.9; 2020 3.7; 2021 3.5.
  - Adverse scenario deviations from the baseline (examples shown): 2019 -5.6; 2020 -2.4; 2021 4.9 (table presents multiple deviation scenarios and detailed series including headline CPI and asset price impacts).

### Additional analysis and stress testing
- Investment Fund Liquidity Stress Tests — Asset Sales (Table 7): Cash Liquidity and bond holdings presented in billions of Baht across Daily FI, MMF, and Total; Total NAV figures include 880, 149, 1,029 in the tabulated lines (preserve source layout). Detailed waterfall and prorata sale scenarios reported in the table.

### Implementation of 2008 FSAP Recommendations (Appendix I)
- Progress summary: Substantial upgrades since 2008 include strengthening BoT’s legal powers, updating insurance supervision to a risk-based framework, improved NPL monitoring, and transition from a blanket guarantee to a limited-deposit insurance system.
- Selected recommendation statuses (prioritization / status):
  - Passage of pending legal reforms to address weaknesses in the financial supervisory framework: Prioritization I; Status I.
  - Strengthen supervisory framework for insurance: Prioritization I; Status I.
  - Improve coordination among supervisory agencies: Prioritization M; Status I.
  - Transition from a blanket guarantee to a limited deposit insurance system: Prioritization M; Status I.
  - Assure full legal and operational independence of the BoT: Prioritization I; Status I.
  - Re-evaluate SFIs taking deposits and their regulation/supervision: Prioritization M; Status PI.
  - Reduce NPLs and distressed assets: Prioritization M; Status I.
  - Bring AML/CFT framework in line with international standard by amending the 1999 AMLA: Prioritization I; Status I.
  - Amend law to reduce legal risk to finality of interbank settlement in bankruptcy: Prioritization M; Status I.

*Source: IMF staff analysis and tables as provided in the content unit.*

### Appendix II. Banking Sector Stress Testing Matrix (STeM)

### Appendix II. Banking Sector Stress Testing Matrix (STeM)

### Banking Sector: Solvency Risk — Institutional Perimeter & Data
- Institutions included (Top-Down by Authorities): 8 banks (5 D-SIBs and 3 IRB banks) and 3 specialized financial institutions.
- Institutions included (Top-down by FSAP Team): 8 banks (5 D-SIBs and 3 IRB banks) and 3 specialized financial institutions (using a similar approach).
- Market share (Authorities): Banks representing 75 percent of banking sector assets.
- Market share (FSAP Team): Banks representing 75 percent of banking sector assets and SFIs representing 95 percent of SFI sector. Combined accounting for 80 percent of bank+SFI sector.
- Data and baseline date (Authorities): Supervisory reports at June 2018; Data on a ‘solo consolidated’ (banking group level); PD/LGD/EAD data for IRB banks.
- Data and baseline date (FSAP Team): Supervisory reports as of June 2018; Data on a ‘solo consolidated’ (banking group level); PD/LGD/EAD data for IRB banks.

### Banking Sector: Solvency Risk — Channels of Risk Propagation & Methodology
- Methodology (Authorities): In-home macro-ST framework (balance-sheet model).
- Methodology (FSAP Team): IMF Solvency Stress Test Workbox (balance-sheet model).
- Satellite models (Authorities):
  - ‘Group 1’ variables dependent on macro factors (effective lending and borrowing rates, effective rate on bonds, loans and liabilities’ growth, equity holdings); relationships estimated via VAR, OLS, dynamic panel regressions.
  - ‘Group 2’ variables dependent on group 1 variables (bond holdings at market price, fees and commissions, non-interest expenses and non-interest-earning liabilities); relationships estimated via OLS.
  - ‘Group 3’ variables calibrated based on expert judgment (other non-interest income and net open position in FX).
- Satellite models (FSAP Team):
  - Seemingly unrelated regression of NPL inflow rates, by economic sector, on macro variables.
  - System-wide regression of credit growth as a function of domestic demand and unemployment (with a judgmental floor to prevent excessive deleveraging), growth of capital determined endogenously within the workbox, growth of liabilities obtained residually.
  - Pre-impairment income estimated piecewise: panel data estimation of banks’ effective interest rates on loans, bonds, and deposits; loan and deposit growth based on system-wide forecasts; historical evidence for non-interest-income items, coupled with judgmental adjustments.

- Stress test horizon (both): 3 years (2019–2021).

### Banking Sector: Solvency Risk — Tail Shocks, Scenarios and Sensitivities
- Scenario approach (Authorities): Scenario-based tests on the entire portfolio; One baseline and two adverse scenarios (one coincides with FSAP adverse).
- Scenario approach (FSAP Team): Scenario-based test on the entire portfolio; variables include global (U.S., China, Japan and Euro area GDP, USD and JPY interest rates, and oil prices) and domestic macrofinancial variables (GDP, inflation, exchange rate, interest rates, unemployment rate, equity prices).
- Baseline scenario (FSAP Team): Based on the June 2018 WEO projections.
- Adverse Scenario drivers (FSAP Team):
  - External shocks: weaker-than-expected growth in China and in advanced economies, sharp rise in risk premia leading to reversal of capital flows and depreciation of the Baht.
  - Domestic amplifiers: excessive risk taking by investors and highly indebted households.
  - Assumption: central bank privileges restoring growth—by cutting the policy rate—over defending the currency, given high level of international reserves and current account surplus and likely fall of imports under the adverse scenario.

- Adverse Scenario macro-path (FSAP Team):
  - Annual GDP growth shocks of -5.6 percent, -2.4 percent, and +4.9 percent over the 3-year horizon.
  - Cumulative two-year deviation of 15.6 percentage-points with respect to the baseline scenario (equivalent to a 2.1 standard deviation shock).
  - Comparison to GaR: first-year GDP decline close to fifth percentile of GaR (-5.9 percent); two-year ahead GaR threshold at the tenth percentile (-2.45 percent).
  - Unemployment rising to 3.0 percent, 3.5 percent, and 2.8 percent over the 3-year horizon.
  - Cumulative decline of the stock price index is 40 percent over the three years, with a negative peak of -55 percent in the first year.
  - Baht depreciation: 12 percent in the first year and still 10 percent below the June 2018 level at the end of the horizon.

- Sensitivity analysis (Authorities):
  - Sensitivity of listed companies’ debt at risk to changes in sales (-10 to -50 percent).
  - Households’ resilience to a drop in income (-20 percent).
- Sensitivity analysis (FSAP Team):
  - Interest rate and sovereign/corporate spread risk in the banking book based on Basel methodology and Value-at-Risk approach.
  - Sensitivity tests on sovereign risk and corporate spread risk (historical simulation at 99 percent confidence level), stock market shocks, and concentration risk.

### Banking Sector: Solvency Risk — Risks, Buffers, Behavioral Adjustments, and Reporting
- Risks/factors assessed (Authorities):
  - Credit losses: determined by increase in NPLs, estimated via panel data regression with macro factors as exogenous variables.
  - Market losses: determined by changes in interest rates (including spreads) and exchange rate.
  - Interest income evolution: based on projected assets and liabilities’ growth and effective lending and borrowing rates.
  - Non-interest income and expenses: forecast based on growth of net fee and commission, growth of other non-interest income; non-interest expenses based on model (fees and commissions) and expert judgment (other expenses).
- Risks/factors assessed (FSAP Team):
  - Credit losses: increase in NPLs for non-IRB exposures and changes in PD/LGD for IRB exposures.
  - Funding costs and interest on loans and bonds: function of short-term interest rates and an added spread reflecting increased credit risk.
  - Income forecast: evolution of prices (interest rates), quantities (growth of assets and liabilities), and impairments (for credit risk).
  - Market risk: impact on fixed income holdings of sovereign/corporate bonds, FX and equity positions.

- Behavioral adjustments (Authorities):
  - Growth rate of loans and interest-bearing liabilities estimated via VAR with macro factors.
  - Growth of equity holdings assumed zero or via OLS with stock index return.
  - Share of bond holdings estimated inversely to loans/assets share.
  - Non-interest-bearing liabilities modeled as function of total liabilities.
  - Net open position in FX projected as historical long-term average of year-on-year NOP.
  - Dividend payout based on historical experience.
- Behavioral adjustments (FSAP Team):
  - Credit growth estimated as function of domestic demand and unemployment; portfolio allocation constant over horizon.
  - Dividend payout judgmental, based on historical experience, with limits on distribution in case of breach of capital buffers.

- Calibration of risk parameters:
  - PDs and LGDs (Authorities): point in time for credit losses. RWA estimated via regression models.
  - PDs and LGDs (FSAP Team): point in time for both credit losses and stressed RWA calculations.

- Regulatory and accounting standards (Authorities):
  - Hurdle rates: capital (CET1, T1, CAR).
  - RWAs for credit risk modeled at aggregate level, separately for performing and NPLs via regressions on macro factors and specific provision over NPL and share of retail NPL over total NPLs.
- Regulatory and accounting standards (FSAP Team):
  - Hurdle rates: capital (CET1, T1, CAR) requirements (inclusive of Capital Conservation Buffer) and leverage ratio requirements as per local regulation (largely implementing Basel III); D-SIB capital surcharge included.
  - RWAs evolve according to assumed credit growth, net of increase in provisions; provisions modeled via changes in PD/LGD for IRB exposures and increase in NPLs for non-IRB exposures.

- Reporting format for results (Authorities):
  - Macroeconomic scenarios for the macro-ST.
  - Results of sensitivity tests on listed corporates and households.
  - Capital ratios pre and post-shock and capital shortfall, by bank (anonymized) and system wide.
  - Distribution of capital ratios: minimum, average, maximum.
- Reporting format for results (FSAP Team):
  - Capital ratios pre and post-shock and capital shortfall, by bank (anonymized) and system wide.
  - Distribution of capital ratios: minimum, average, maximum.

---

### Banking Sector: Liquidity Risk — Institutional Perimeter & Data
- Institutions included (Authorities): 5 D-SIBs and 3 IRB banks for the LCR and cash-flow analysis.
- Institutions included (FSAP Team): 5 D-SIBs and 3 IRB banks for the LCR and cash-flow analysis. Simplified liquidity stress test for 3 largest SFIs.
- Market share (Authorities): 75 percent banking sector assets.
- Market share (FSAP Team): 75 percent of banking sector assets and 95 percent of SFI sector assets. Combined accounting for 80 percent of bank+SFI sector.
- Data and baseline date (Authorities): June 2018 LCR analysis and liquidity gap analysis; Supervisory data.
- Data and baseline date (FSAP Team): June 2018 for LCR and cashflow analysis; Supervisory data.
- Scope of consolidation: Consolidated basis (both).

### Banking Sector: Liquidity Risk — Methodology & Risks
- Methodology (Authorities): Basel III-LCR; LCR scenario with variants (baseline and severe) based on the RAM.
- Methodology (FSAP Team): Basel III-LCR and NFSR; LCR and cash-flow test scenario with variants (severe, retail, wholesale funding, and mutual funds); cash-flow based liquidity stress testing using maturity buckets by banks.
- Risks (both): Funding liquidity shock (short-term liquidity outflows); Market liquidity shock (asset price shocks and fire-sales).
- Buffers (Authorities): Counterbalancing capacity; Central bank facilities; HQLA-equivalent assets (for cash flow analysis only).
- Buffers (FSAP Team): Counterbalancing capacity; Central bank facilities.

### Banking Sector: Liquidity Risk — Tail Shocks, Calibration, and Reporting
- Size of the shock (Authorities): Run-off rates calculated following historical data, BoT expert judgement, and internal forecasts derived from RAM.
- Size of the shock (FSAP Team): Run-off rates calculated following historical events, IMF expert judgement, Thai authorities and LCR rates; bank run and dry up of wholesale funding markets, taking into account haircuts to liquid assets.
- Regulatory calibration (Authorities):
  - Haircuts and run-off rates based on regulatory parameters; For LCR, see BCBS (2013), The Liquidity Coverage ratio and Liquidity Risk Monitoring Tools Basel, January 2013.
  - Stressed: RAM severe scenario (one-month horizon for LCR Severe scenario).
  - Inflow rates derived from projected NPL of solvency stress test.
  - Haircuts based on historical bond price movement and haircuts applied by BoT under ELA framework.
  - Run off rates calibrated based on percentile of monthly changes in deposits mimicking weighted average of outflows during the 1997 Asian Crisis.
- Regulatory calibration (FSAP Team):
  - Haircuts and run-off rates based on regulatory parameters; For LCR, see BCBS (2013), The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools Basel, January 2013.
  - Stressed: more severe haircuts under a political turmoil scenario and larger run-off rates to reflect more severe episodes.
- Regulatory standards and hurdles:
  - For the LCR phase in (Authorities): hurdle set to 80 percent.
  - For the LCR (FSAP Team): hurdle set to 100 percent.
  - For the cash-flow analysis (FSAP Team): hurdle rate is to have a non-negative cash balance.
- Reporting format for results (both):
  - Number of banks that fail to meet the hurdle and their assets share in the banking sector.
  - Bank-level survival period in days; number of banks that still can meet their obligations.

---

### Banking Sector: Contagion Risk — Institutional Perimeter & Data
- Institutions included (Authorities):
  - All commercial banks (balance-sheet analyses) or listed banks, listed insurance companies, listed finance, and securities companies (market data analyses).
  - 36 commercial banks and 27 sectors listed in SET.
  - Coverage: 91 percent of total banking assets; 65 percent of banking and insurance assets.
- Institutions included (FSAP Team): Banks; Insurance companies.
- Data and baseline date: June 2018; Supervisory and market data (both).

### Banking Sector: Contagion Risk — Methodologies and Tail Shocks
- Methodologies (Authorities):
  - Five models/indicators: (i) bank network analysis model (Espinosa-Vega and Solé, 2010); (ii) interbank market network model (Bonacich’s Eigenvector Centrality); (iii) payment system network model (Bonacich’s Eigenvector Centrality); (iv) CoVaR measures; and (v) Variance Decomposition results from Diebold-Yilmaz methodology.
  - New methodology planned: Disaggregated Balance Sheet Network (based on Civilize et al., 2018, forthcoming) to profile and stress test system via consistent disaggregated balance sheets.
- Methodologies (FSAP Team):
  - Interbank and cross border network model by Espinosa-Vega and Solé (2010).
  - Diebold-Yilmaz variance decomposition connectedness methodology.
  - A Comprehensive Multi-sector Tool for Analysis of Systemic Risk and Interconnectedness (SyRIN approach).

- Tail shocks / Size of the shock (both):
  - Balance-sheet data: analysis of impact of default of single institutions or group on whole network; ranking of institutions by contagion (outward spillover) and vulnerability (inward spillover).
  - Market-based data: conditional probability of distress for single institutions or the whole network if one or more institutions default; ranking by “from”, “to”, and “net” connectedness measures.
  - SyRIN (FSAP Team): metrics including tail risk, cross-entity interconnectedness and contribution to systemic risk by different entities and sectors.

- Reporting format for results (both):
  - Number of undercapitalized, failed or illiquid institutions, and their shares of assets in the system.
  - Evolution and direction of spillovers within the network.

---

### Mutual Funds: Liquidity Risk (Top-down by FSAP Team)
- Institutions included: 32 daily FI and 11 MMFs.
- Market share: 31 percent of total AUM.
- Date and baseline date: September 2018.
- Methodology: Liquidity measures by (i) cash and short-term debt securities < 1year; and (ii) cash and high-quality liquid assets.
- Risks: Liquidity outflows and inability to liquidate assets to cope with redemptions.
- Buffers: Liquidity buffers.
- Tail shocks — Size of the shocks: Monthly redemption shock equal to 1 th percentile of historical net flows.
- Regulatory standards: None.
- Reporting format for results: Redemption coverage ratio by investment fund and liquidity shortfall; Number of funds and share of funds that cannot meet their obligations.

---

### Appendix III. Thrift and Credit Cooperatives and Credit Unions — Key Findings
- Financial cooperatives (TCCs and CUs) serve over 4 million members and account for 16 percent of household debt.
- TCCs:
  - Positive financial performance could be masking over-indebtedness of many members and risks to other financial institutions that lend to the same customers.
  - Low level of NPL indicator may be distorted by priority that claims of TCCs have over those of other lenders and lending practices that allow systematic rollover of debt.
- CUs:
  - Mixed performance; loan portfolio showed past due loans of 58 percent in 2016 and 26 percent in 2017.
  - Past due loans spiked in 2015 to 66 percent due to failure of the largest CU (which managed 20 percent of the sector’s assets) following a large alleged fraud by its management.
  - Past due loans may not be adequately provisioned for.
- Data sharing and governance:
  - Cooperatives generally do not share information with the NCB; borrowers’ overall debts are not taken into account by other lenders.
  - TCC and CU sectors are organized into federations, but these play a limited role.

*Source: Appendix II. Banking Sector Stress Testing Matrix (STeM) and Appendix III as provided in the supplied content.*

### 2.       A regulatory and supervisory regime for financial cooperatives should be defined and

### 2.       A regulatory and supervisory regime for financial cooperatives should be defined and its implementation initiated

### Governance, institutional roles, and capacity
- The Cooperative Promotion Department (CPD) of the MoAC is responsible for promoting cooperatives and for regulating and supervising them.
- Recommendation: In the medium term, MoAC should do its utmost to separate its regulation and supervision functions from its promotion function and ensure the independence of the former.
- Ongoing collaboration between the BoT and the MoAC should be institutionalized.
- Strengthen:
  - the regulatory and technological capacities of the CPD and the Cooperative Audit Department (CAD) of the MoAC;
  - CPD’s enforcement powers.

### Monitoring member indebtedness, loan portfolios, and macroprudential capacity
- Given risks and social implications of high indebtedness of cooperative members, CPD should work closely with BoT and the cooperative federations to determine the actual level of debts.
- Strengthen monitoring of loan portfolios.
- Consider requiring cooperatives to report their members’ debts and repayments to the NCB.
- Enhance CPD’s supervisory capacity to adopt BoT’s recommended macroprudential measures to cooperatives as appropriate.
- Assess options to establish liquidity and/or solvency funds under close oversight of CPD.
- Strengthen capacity of cooperative federations to provide services to their members (information technology, management, internal control), provided federations are properly regulated and supervised according to their roles and functions.

### Financial safety net, deposit insurance, and access to BoT ELA
- There is no financial safety net for financial cooperatives:
  - Deposits at Thai financial cooperatives are not backed with deposit insurance.
  - Thai federations do not have mechanisms or dedicated funds that could be tapped by a distressed affiliate.
- Exception: a voluntary emergency liquidity arrangement being tested by one federation which has attracted 50 TCCs to participate on a voluntary basis; however, cooperatives’ funds are placed as term-deposits and can be withdrawn at maturity, making this scheme an unreliable safety net.
- Given weaknesses in administrative and reporting capacity of TCCs and CUs, poor quality of information, and mixed financial performance:
  - It is not advisable that the sector be covered by deposit insurance at this stage.
  - ELA of the BoT should not be extended to the sector for the foreseeable future.
- Recommended strategy:
  (i) Strengthen the prudential soundness of entities in the sector (broadly aligned to the prudential requirements applicable to small banks in the case of financial cooperatives of similar size) while enhancing the supervisory capacity of MoAC with support from BoT.
  (ii) Establish liquidity and solvency funds (similar to the IPS system in Europe) for the two main types of cooperatives to help implement recovery plans / facilitate the exit of troubled entities through mergers and acquisitions.
- Medium-term legal reform: Amend the resolution law applicable to the sector to broadly align to the Key Attributes in a proportionate manner.
- Coverage by deposit insurance and access to ELA could follow later, once:
  - these measures have been implemented; and
  - the deposit-taking entities meet acceptable prudential standards.

### Appendix IV — FinTech: opportunities and regulatory implications
- Thailand has an active FinTech ecosystem with proliferation of new payments companies and instruments; all three regulators have created regulatory sandboxes.
- Current assessment: FinTech does not at this time present a financial stability risk, but robust monitoring is needed.
- Recommend articulation of an overall regulatory strategy because digital financial services can rapidly change the risk profile of products or customer segments.
- Areas recommended for enhancement:
  - ID infrastructure: building blocks for e-KYC and fully digital onboarding exist; lack of a public authoritative source accessible digitally on a level playing field. Initiatives include the National Digital ID (NDID) and DOPA notification on data sharing under data subjects' authorization.
  - Competition: supportive market-entry regulatory framework important to achieve BoT policy imperatives (efficiency and inclusion) while preserving immunity. BoT Sandbox has produced joint-innovation projects; most projects have been bank-led or incumbent–FinTech partnerships. Alternative approaches may be required to foster competition envisioned in the Financial Sector Master Plan.
  - Data gathering: BoT could update offsite reporting templates to reflect new products and payments forms; scope to collect more granular data including cost structures, active users, and inclusion metrics.
  - Sandbox operations: consider adjusting testing and risk monitoring frameworks to enhance space for business model innovations as well as technology; testing should cover technology, operations, business model issues, and potential regulatory requirements (capital, earnings, fit-and-proper criteria). Ensure market clarity on protection of innovations for solo projects and on exit criteria.
  - Regulating new products and product-level approvals: clarify when existing activity-based regulations apply versus need for new laws; adapt product approval processes to balance speed, complexity, and readiness while maintaining consumer protection; consider umbrella approvals or exposure thresholds.
  - Supervision: BoT, OIC, and SEC oversight processes may need updating as new providers and hybrid business models emerge; build supervisory capacity to understand business models and technology, and adapt strategies including use of SupTech. Recommend timely issuance of guidance for crowdfunding and collecting more granular payments and cost-structure data.

### Selected financial system statistics and context (as of dates in text)
- Financial system assets amount to 259 percent of GDP (June 2018).
- Assets of Thailand's 30 commercial banks account for 46 percent of financial sector assets.
- 8 state-owned SFIs account for 15.6 percent of financial sector assets.
- The three largest commercial banks account for 44 percent of banking sector assets.
- Banking assets: 125 percent of GDP in 2017 (compared to 105 percent in 2007).
- Market capitalization of the SET in 2017: 96.6 percent of GDP (up from 67 percent of GDP in 2005).
- Insurance sector assets in 2017: over 25 percent of GDP, constituting 9 percent of financial sector assets.
- Savings and credit cooperatives and credit unions represent about 6.5 percent of the financial sector assets.
- Commercial banking loan portfolio distribution (as of end-2017): financial and insurance 23 percent; mortgages, real estate, and construction 20 percent; manufacturing 15 percent; consumer finance 14 percent; wholesale and retail trade 13 percent; others 15 percent.
- Customer deposits represented more than 70 percent of total funding in December 2017.
- Aggregate capital adequacy ratio for commercial banks: above 15 percent over the last decade, peak of 18.5 percent in Q3 2017; regulatory requirement 8.5 percent; no banks below 15.5 percent.
- Commercial banks' NPLs: 3 percent (down from 8 percent in 2007); ticked up from 2.15 percent in 2014.
- SFIs reported NPLs of 4.5 percent and aggregate CAR of 12.5 percent; regulatory requirement 8.5 percent.
- Number of saving and credit cooperatives: 1,409; credit unions: 544.
- International reserves: US$215 billion representing 51 percent of GDP as of Q1/2018.
- GDP growth in 2017: 4.0 percent yoy in Q4.
- Public debt to GDP at end-2017: 41.2 percent.
- Financial Stability Unit (FSU) established in 2016 within BoT to monitor and identify areas of financial risk build-up, design macroeconomic scenarios for stress testing, and develop a macroprudential toolkit.

*Source: 1thaea2019001 - 2.       A regulatory and supervisory regime for financial cooperatives should be defined and its implementation initiated.*

### 12.      The FSU and line departments meet regularly to discuss and assess financial stability

### 12.      The FSU and line departments meet regularly to discuss and assess financial stability

### Coordination and governance of financial stability
- The sub-committee of Financial Stability holds formal, quarterly meetings chaired by the BoT Governor, during which risk assessments are discussed.
- In preparation for the sub-committee meetings, the BoT internal Financial Stability Working Group (internal FSWG) meets to discuss issues regarding financial stability and risk assessments.
- Assistant governors from financial stability-related line departments participate in the internal FSWG meetings, which are chaired by assistant governors of the Monetary Policy Group and Financial Institutions Policy Group with the Financial Stability Unit director as a secretary.
- The BoT, SEC, and OIC coordinate financial system surveillance through the FSWG.
- These authorities also participate in the Three-Regulator Steering Committee, which reports to both the Committee and the Joint Meeting of the Monetary Policy Committee (MPC) and the Financial Institutions Policy Committee (FIPC).
- The SEC and the OIC are also members of the FIPC.
- Risks to financial stability are discussed and key issues consolidated at FSWG meetings; key issues are then escalated to the Joint Meeting of the MPC and the FIPC as well as the Three-Regulator Steering Committee.

### Legal framework and court system
- Thailand has a civil legal system based on case law; the Constitution is the supreme law.
- Enactment of a law can be by the Legislative Branch (Parliament) or through the Executive Branch (Cabinet).
- Subordinated law can be issued as a Royal Decree (promulgated by the Cabinet) or as ministerial regulation by an authorized minister.
- Courts are classified into four categories: Constitutional, Administrative, Military, and the Courts of Justice.
- The Courts of Justice are classified into three levels: Courts of First Instance (general courts, juvenile and family courts, and specialized courts), the Courts of Appeal (the Court of Appeal and nine Regional Courts), and the Supreme Court (final court of appeal in all civil and criminal cases).

### Legal profession, accounting, and standards
- Practice of law follows the Lawyer Act, the Judicial Service Act, and the Public Prosecution Organ and Public Prosecutor Act; lawyers must obtain license by passing an examination of the Law Society of Thailand and become its member.
- The Accounting Profession Act (October 2004) establishes the Federation of Accounting Professions (FAP) as a self-regulated entity.
- The FAP has power to formulate accounting and auditing standards; develop a code of ethics; issue, suspend, or revoke auditing licenses; and issue regulation for Continuing Professional Development.
- Thai Accounting Standards (TAS) and Thai Financial Reporting Standards (TFRS) are in line with the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), except for the standards covering financial instruments (IAS 32, IAS 39, and IFRS 7).
- Thai Standards of Auditing conform to the International Standards on Auditing (ISA).
- TASs and TFRSs are applied to all public companies, banks, insurance companies, securities companies, and mutual funds.

### Payment systems and financial market infrastructure
- The BoT is empowered under the BoT Act to operate the payment systems and conduct activities to maintain payment systems stability.
- BAHTNET (BoT Automated High-Value Transfer Network) is the only large value payment system operated on real time gross settlement basis and is considered as a Systemically Important Payment System (SIPS).
- BAHTNET, owned and operated by BoT, provides inter-institution funds transfer service for financial institutions and provides final settlement to net clearing positions from retail payment systems such as cheque clearing (ICAS) and interbank retail funds transfer system (ITMX).
- Under the BoTA, the Payment Systems Committee (PSC) is established and empowered to formulate policies about the payment systems under supervision of the BoT and inter-bank clearing systems to ensure their efficiency and stability and to monitor the BoT's related activities.
- The PSC acts as both the oversight board of the payment systems and the FMI's board for BAHTNET; it oversees operations and key performance of BAHTNET and approves the risk management framework for BAHTNET's operations.

### Credit information and the National Credit Bureau (NCB)
- The National Credit Bureau (NCB) is the single private credit bureau in Thailand banks can join; it is the result of the 2005 merger by the Thai Credit Bureau and Central Credit Information Services.
- The NCB is governed by the Credit Information Business Act B.E. 2545 (2002).
- As of June 2017, the NCB had 96 members including banks, nonbanks, leasing companies, and saving cooperatives.
- Since May 2017, the NCB has been offering NCB scores for both consumers and SMEs to members which could be incorporated into their internal credit scoring.

### Deposit protection and DPA
- The Deposit Protection Act B.E. 2551 (DPA Act) was passed in 2008, establishing the DPA supervised by the MOF.
- The DPA acts as a paybox-plus and has three primary objectives: (i) to provide protection for deposits in financial institutions; (ii) to enhance confidence and stability in the financial institution system; and (iii) to manage financial institutions subject to control under the FIBA and liquidate financial institutions whose licenses have been revoked.
- Membership under the DPA scheme is compulsory for all financial institutions (commercial banks (both local and foreign), finance companies, and credit foncier companies); currently, there are 35-member institutions.
- The maximum annual premium rate that members remit to the Deposit Protection Fund cannot exceed 1 percent of the average value of eligible deposits at the insured institution; at present, the annual premium rate is 0.01 percent.
- As of the end of 2017, the size of the Deposit Protection Fund was THB 120.03 billion. This represents around 3 percent of insured deposits.
- The DPA protects Baht deposits and accrued interest of both individuals and legal persons. Types of accounts protected include current accounts, savings accounts, fixed deposit accounts, certificates of deposit, deposit receipts, and other deposit accounts with obligations to pay back depositors.
- Exclusions from the deposit protection scheme include Non-Resident Baht Accounts, derivative-embedded deposits, and interbank deposits.

### Corporate governance initiatives
- The SEC, in collaboration with the SET and the Thai Institute of Directors, has taken measures to enhance corporate governance standards.
- Measures include requiring companies to obtain approval to issue and offer for sale securities and adherence to the Investment Governance Code for institutional investors.
- The BoT focuses on enhancing corporate governance and management systems for financial institutions and financial business groups.
- In May 2018, the BoT revised regulations on: (i) fit and proper criteria of the director, manager, person with power of management, and advisor of the financial institution; (ii) the directors' responsibilities in financial institution management; (iii) the establishment of the board of directors and subcommittees including their composition, qualifications, and responsibilities; and (iv) disclosure of information.
- The BoT revised the Handbook for Directors of Financial Institutions to emphasize roles and responsibilities of the board for each aspect of governance.

### Main findings (Responsibilities, supervision, and practices) — (CPs 1–3, 8–13)
- The BoT has clear objectives and the necessary legal powers to conduct ongoing supervision, address compliance with laws, and undertake timely corrective actions for banks.
- In areas where the BoT recommends and the MOF approves (licensing, revoking a license, and approving non-Thai shareholders and directors), there have been no instances where the MOF has not followed the BoT’s recommendations.
- The current mix of roles in SFI supervision and regulation between the MOF and the BoT increases BoT’s reputational risk from potential political interference.
- There are eight SFIs in Thailand, each with a different mandate; four SFIs are deposit-taking institutions and comply with the definition of a commercial bank in accordance with FIBA.
- The MoF has delegated large parts of supervision to the BoT but not corresponding powers to take corrective action against problems in SFIs or to set legally binding SFI regulations without ministerial approval, exposing the BoT to reputational risk that could affect its role as regulator and supervisor of banks.
- FIBA provides a framework for the BoT to set minimum enforceable prudential standards for banks and banking groups; the BoT issues banking notifications that are subordinate legislation of FIBA and considered as law.
- BoT guidance is not considered law; guidance is usually released to apply industry best practice in areas such as risk management.
- The BoT should publish more comprehensive response papers to public consultations on important notifications instead of, or in addition to, attaching brief questions and answers to the notifications.
- The BoT is well resourced, has transparent processes for appointment and removal of the governor and members of its governing body, and has adequate legal protection for its staff.
- Rotations of frontline supervisory staff occur as a matter of practice and should be formalized in policy; relationship managers and their teams should be rotated after 3–5 years of supervising the same institution or banking group, with a maximum period to be established.
- Factors with potential to interfere with BoT’s independence include: permanent presence of the Director General of the FPO on the FIPC; presence of the Secretary-General of the Insurance Commission and the Secretary-General of the Securities and Exchange on the FIPC; Section 42 of FIBA requiring FIPC and Cabinet approval for ELA that may expose BoT to political interference; the need for the BoT to notify the MOF when applying the PPA framework and the PCA; and the BoT’s weak financial position despite continued operation amid negative net worth.
- Parts of SFI supervision and regulation were recently transferred to the BoT; SFIs are supervised by a separate department that reports to the Assistant Governor of the Supervision Group, the same as commercial bank supervision departments, creating potential contamination between SFI and commercial bank decision-making.
- Formal and informal arrangements for domestic and international cooperation exist and function well; domestic coordination occurs through cross directorship of the FIPC and the Three-Regulators Steering Committee, and working-level groups and domestic supervisory colleges hold regular meetings, formalized in MOUs that allow exchange of confidential information based on FIBA provisions.
- Methods of ongoing supervision are well established: the BoT bases supervisory scope on risk-based analysis, supervises banks via teams under a relationship manager (RM) responsible for onsite examinations and offsite analysis, and demonstrates flexibility by decreasing reliance on annual onsite examinations, expanding offsite analysis, expanding use of early warning indicators, and incorporating macroeconomic trends into supervisory scope.
- Follow-up on recommendations is effective: recommendations in examination reports are discussed with senior bank management, a copy is sent to the bank's board, response dates are established, and examiners follow-up as part of offsite monitoring.
- A bank's risk profile is reflected in a composite rating covering significant activities; the composite rating aids supervisors in developing supervision plans and allows targeted supervisory activities.
- The BoT's consolidated supervision powers have been significantly enhanced: FIBA was amended to include consolidated supervision over banking groups and financial business groups (FBGs); FIBA grants the BoT authority to approve establishment of FBGs, require structural changes that impede supervision, and to supervise bank, parent, subsidiaries, and affiliates as if they were the same juristic person.
- The BoT maintains detailed organizational charts of all FBGs and their ultimate beneficial owners.
- The BoT's supervisory framework and practices increasingly focus on qualitative factors (governance, risk management, risk appetite) alongside quantitative factors (capital, liquidity); transaction testing is performed to assess bank operations and processes.
- Inspection reports are moving away from audit and compliance approaches toward risk analysis; issuing best practices guidance and defining supervisory expectations would encourage migration from auditing to risk analysis and facilitate corrective action based on qualitative factors.
- Ensuring banks' internal controls and audit adequately monitor and control transaction risk is an additional supervisory pillar.

*Source: 1thaea2019001 - 12.      The FSU and line departments meet regularly to discuss and assess financial stability*

### 38.      The BoT has available a broad range of possible measures to timely address safety and

### 1thaea2019001 - 38.      The BoT has available a broad range of possible measures to timely address safety and

### PPA/PCA authority, Guideline alignment, and internal procedures
- Finding: The BoT has a broad range of possible measures to timely address safety and soundness issues, but BoT internal procedures could be enhanced.
- Finding: Under the Guideline, PPA measures are applied to banks classified as "weak" and, which "would cause damage to public interest."
- Finding: Chapter 5 of FIBA defines and provides the BoT authority to apply the measures addressed in the BoT Guideline but does not link their application to the bank classification.
- Finding: Chapter 5 very broadly defines actions causing public damage and requiring notification to the MOF.
- BoT view: The BoT is of the opinion that Chapter 5 measures may be applied and not require the MOF notification.
- Recommendation/analysis:
  - Amend the Guideline to clarify that Chapter 5 measures may be applied independent of a specific bank classification.
  - Clarify the need to notify the MOF to increase effectiveness and clarity for supervisors.
  - Aligning FIBA, the Guideline and BoT practice would expedite application of PPA.
  - Amending the Guideline is timely given banks' prompt response to inspection recommendations but changing circumstances may require stronger measures.

### Early warning triggers and qualitative enhancements
- Finding: The Guideline has integrated financial triggers according to the early warning system aligning it with PPA/PCA.
- Finding: The BoT is enhancing qualitative elements such as the quality of risk management into triggers.
- Recommendation: Continue to clarify BoT authority to implement PPA and the circumstances in which it applies.

### Corporate governance (CP14)
- Finding: The BoT's corpus of regulations, guidelines, and the corporate governance supervisory manual are comprehensive, enforceable, and in line with international good practice.
- Implementation dates and scope:
  - Solo corporate governance regulation came into effect since June 2018.
  - For FBG, the enhancement to the governance requirement will be in effect from May 2019 onwards.
- Objectives of enhancements: Strengthen management systems, transparency, and market discipline by reinforcing the BoT's expectation of (i) responsibility of the parent company board on oversight of subsidiaries, and (ii) composition of the parent company's board and subcommittees.
- Transitional/grandfathering issues:
  - Independent directors that have been in service for more than nine years will be grandfathered till May 2022.
  - The requirement for a risk oversight committee comes into effect on May 1, 2019.

### Prudential requirements, regulatory framework, accounting, and disclosure (CPs 15–29)
- Risk management processes:
  - Finding: The BoT determines that banks have comprehensive risk management processes, including effective board and senior management oversight to identify, measure, evaluate, monitor, report, and control all material risks on a timely basis.
  - The BoT has comprehensive and detailed requirements for credit risk, market risk, operational risk, liquidity risk, and IT risk, including conservative assumptions linked to capital adequacy requirements.
  - The BoT requires development of, and reviews banks' contingency plans.
- Recommendation: As a risk-based supervisor, the BoT should better articulate supervisory expectations by publishing best-practice guides after thematic reviews or when divergent practices are observed to support international standing.

### Capital adequacy and supervisory calibration
- Findings and statistics:
  - The BoT sets conservative capital adequacy requirements; components of capital absorb losses and the capital requirements are in line with Basel III.
  - The average CET1 ratio for D-SIBs sits around 15 percent and 16 percent for non-D-SIBs.
  - Foreign bank branches are required to hold capital like domestic banks.
  - Three banks can use internal models for credit risk.
  - Two foreign bank branches have been accredited to use the market risk internal model approach.
  - The BoT will require a 1 percent add-on for D-SIBs by 2020.
- Supervision capability: The BoT has a well-staffed specialized team that accredits and oversees modelling by banks.
- Recommendation: Develop a methodology to facilitate individual capital ratios, at least for the largest and most complex banks, building on the risk-based supervisory framework.

### Credit risk, asset classification, and provisioning
- Shortcomings identified:
  - The BoT's definition of restructuring and rescheduling is not in line with the definition of forbearance in international good practice; it should include financial difficulty of the borrower and should not be conditioned on the bank making a loss.
  - The probation period for restructured exposures to be upgraded is currently three months, while international good practice requires it to be a minimum of one year.
  - The BoT regulation allows an upgrade of the exposure to take place when restructuring or rescheduling is granted.
  - There is no limit on the number of times banks can reschedule or restructure (evergreening).
  - Regulation should be more detailed on the level of application of the asset classification (borrower or transaction level).
  - Banks should be required to include a list of indicators to determine the "unlikeliness to pay" in their policies.
- Supervisory mitigation: BoT supervisors perform in-depth procedures to address these regulatory weaknesses.
- Provisioning level: Current provisioning coverage levels are standing at 140 percent, high compared to international peers.
- Regulatory change:
  - The BoT has issued a revised regulation to be implemented after TFRS 9 becomes effective in 2020.
  - Under the revised regulation assets will be classified into 3 classes: performing, under-performing, and nonperforming.
  - For assets classified as performing, provisions shall be set against expected credit losses over a 12-month period.
  - For assets classified as under-performing and nonperforming, provisions shall be set against expected credit losses over the expected life.
  - The revised regulation was not in force at the time of the assessment but is expected to address most of the weaknesses listed above.

### Related-party lending; other risk monitoring
- Finding: A detailed related-party lending legal framework has been established; the definition of related party is broad and provides significant latitude for the BoT to use supervisory judgment.
- Restriction: Directors, senior managers, and persons with power of management are not permitted to borrow from the bank.
- Finding: The BoT closely monitors related party transactions and reviews intra-group lending.
- Other risks monitored: Country, liquidity, market, interest rate, and operational risks are monitored under a fully-developed and comprehensive regulatory framework following Basel guidance; data feeds risk dashboards.
- Observation: Cross-border lending and establishments are increasing, highlighting the need for close monitoring of risk appetite statements and growth strategies.

### Accounting standards and AML/CFT supervision
- Accounting:
  - Finding: At the assessment date, Thai accounting standards are generally in line with IFRS.
  - The BoT's asset classification and provisioning standards used in banks' financial statements are more conservative than IAS 39.
  - Quantitative impact studies revealed outcomes of current BoT provisioning standards are closer to IFRS 9.
  - IFRS 9 (TFRS 9) will be fully implemented in 2020.
- AML/CFT:
  - Finding: The mutual evaluation review (MER) by the Asia Pacific Group disclosed areas for improvement in AML/CFT supervision.
  - AMLO is the primary regulator but the BoT also plays an important role.
  - MER identified gaps: beneficial owner identification not always required; no explicit requirement for PEP source of wealth to be identified; originator and beneficiary information for wire transfers not required for transactions originated by non-customers of the bank.
  - There is no requirement to file suspicious transactions reports (STRs) for transactions between government entities, including state owned enterprises (SOEs).
  - Status: Amendments to legislation are undergoing the approval process to address these shortcomings.

### Summary compliance observations and supervisory recommendations (selected Principles 1–11)
- Principle 1 (Responsibilities, Objectives, and Powers):
  - Finding: The BoT has objectives and necessary legal powers to conduct ongoing supervision and undertake timely corrective actions.
  - Observation: In areas where the MOF decides based on BoT recommendation (licensing, revoking a license, approving non-Thai shareholders and directors), there have been no instances where the MOF did not follow BoT recommendations.
  - Concern: Incomplete transfer of responsibilities in supervising SFIs may expose BoT to reputational risk and misperception of supervisory role.
- Principle 2 (Independence, Accountability, Resourcing, and Legal Protection):
  - Findings and concerns:
    - The appointment/removal process for governor and FIPC is transparent; BoT has adequate resources and training; legal protection for supervisors is adequate.
    - Factors that may interfere with operational independence include:
      - Permanent presence of the Director General of the FPO on the FIPC is not in accordance with international good practice; recommendation to limit permanent membership and include only in crisis times.
      - Presence and participation of the Secretary-General of the Insurance Commission and the Secretary-General of the Securities and Exchange on the FIPC dilutes operational independence; direct involvement of officials from other agencies in decision making is not good practice.
      - Section 42 of the BoT Act requires FIPC and Cabinet approval before granting loans or financial assistance in serious liquidity problems, which affects independence and implies government underwriting of ELA; Section 42 is likely to be used if a D-SIB requires ELA.
      - The BoT needs to inform the Minister in case PPA or PCA is taken.
      - The BoT has had negative net worth for several years; assessors confirm adequate performance despite weak financial position but note reputation and independence risks.
  - Recommendations:
    - The composition of the FIPC should not include the Director General of the FPO on a permanent basis; add in crisis times if needed.
    - Formalize and enforce rotation policy for supervisory staff: relationship managers should be rotated after 3–5 years supervising the same institution/banking group; establish a maximum period any supervisor can be assigned to the same institution.
- Principle 3 (Cooperation and Collaboration):
  - Finding: Domestic and cross-border cooperation and information sharing with domestic and international authorities is effective; MOUs and supervisory colleges evidence cooperation.
- Principle 4 (Permissible Activities):
  - Finding: Permissible activities are limited to financial sectors; through subsidiaries, banks may offer securities and insurance products.
- Principle 5 (Licensing Criteria):
  - Finding: Applications for new banks are only accepted in pre-determined periods. The last period for filing applications closed in 2014; four licenses were granted. One application was denied in 2016 because it was filed after closing of the 2010–2014 licensing period.
- Principle 6 (Transfer of Significant Ownership):
  - Finding: Since 2017, there have been two significant ownership changes approved and two denied.
- Principle 7 (Major Acquisitions):
  - Finding: Most applications are routine and auxiliary; one denial involved an application to establish an FBG due to lack of sound reasoning and proof of sufficient financial resources.
- Principle 8 (Supervisory Approach):
  - Finding: The BoT has established a supervisory process supporting risk-based supervision using a risk matrix to rate banks and develop supervisory scope; further linking benchmarks and analysis to supervisory scope would continue development.
- Principle 9 (Supervisory Techniques and Tools):
  - Finding: Offsite and onsite reviews are performed by the same supervisory teams under a relationship manager; inspections are evolving to address qualitative factors such as adequacy of board policies.
- Principle 10 (Supervisory Reporting):
  - Finding: The BoT collects financial reports regularly and has authority to collect supplemental information; information supports monitoring of banking groups and detailed risk indicator analyses.
- Principle 11 (Corrective and Sanctioning Powers):
  - Finding: The BoT has well-developed operational policies and guidance for enforcement; FIBA establishes the legal framework for enforcement. 

*Source: IMF mission assessment text (Thailand): content unit 1thaea2019001.*

### Chapter 5 of FIBA provides the BoT with a broad range of possible measures to address

### Chapter 5 of FIBA provides the BoT with a broad range of possible measures to address

### Summary of the issue
- Chapter 5 of FIBA provides the Bank of Thailand (BoT) with a broad range of possible measures to address safety and soundness issues at an early stage.
- The BoT has implemented an internal operating guideline for application of the measures outlined in Chapter 5 (Guideline for PPA and PCA).
- As currently structured under the Guideline, implementation of Chapter 5 corrective action by BoT is linked to “Weak” banks and thus not initiating until the bank is exhibiting significant weaknesses, although Chapter 5 does not set Weak bank classification as a threshold.
- The Guideline also links corrective action to FIBA section 92 and bank conditions that may “cause damage to the public interest.” Section 92 provides an expansive list of circumstances requiring notification to the MOF if corrective action is applied.
- BoT representatives confirmed most actions listed under the Guideline could be applied at earlier stages and independently of the process described in the Guideline and FIBA, and without MOF notification.
- In practice, BoT has not had to resort to PPA measures because banks promptly respond to BoT recommendations (Orders).

### Findings and issues identified
- The Guideline should be amended to:
  - expand on the application of corrective measures in Chapter 5;
  - clarify that Weak bank status is just one of the benchmarks for applying corrective action.
- Notifying the MOF may be more appropriate for actions involving banks with a composite rating of “5” or systemically important banks.
- There is misalignment between FIBA, the Guideline, and actual BoT practice; alignment is recommended.
- Suggested operational changes include exercising flexibility to pursue formal corrective actions at earlier stages of bank condition and increasing implementation triggers.
- Medium-term recommendation: amend FIBA to narrow the “causing public damage” definition to parallel possible bank resolution cases.

### Recommendations specific to Chapter 5 / PPA and PCA
- Amend Guideline to address application of corrective measures in Chapter 5 in general terms and in specific circumstances such as a Weak bank. Consider using the term PPA as it is used internationally and not in the narrow sense of extreme circumstances.
- Discuss and provide a revised Guideline to stakeholders to ensure transparency.
- Medium-term, work with MOF to narrow definition of the public damage clause to approximate actions taken in cases of serious deterioration of a bank that may lead to possible resolution and require MOF involvement.
- Raise expectation for more formal supervisory action and PPA to banks at the “3” rating level and establish other early financial triggers and qualitative benchmarks for supervisory action.

### Prudential supervision highlights and other thematic findings
- Principle 12 (Consolidated Supervision)
  - BoT supervises FBGs headed by banks and, for the three headed by holding companies, BoT can request all information required and perform fit-and-proper tests on significant shareholders, directors and management.
  - Changes to FBG structure must receive BoT approval. Supervisors demonstrate full familiarity with ownership, activities, and condition of groups.

- Principle 13 (Home-Host Relationships)
  - As a host supervisor, BoT attended four supervisory colleges in 2017 and two in 2018.
  - As a home supervisor, BoT organized one supervisory college in 2018 and two in 2016. Given insignificance of foreign operations, this is considered adequate.

- Principle 14 (Corporate Governance)
  - BoT comprehensively assesses corporate governance policies and processes commensurate with risk profile and systemic importance.
  - New BoT regulation on corporate governance came into effect since June 2018 at solo level; for FBG enhancement will be in effect from May 2019 onward.
  - The enhancement reinforces (i) responsibility of the parent company board on oversight of subsidiaries, and (ii) composition of the parent company’s board and subcommittees.
  - Transitional/grandfathering measures (BoT Notification No.FPG. 10/2561):
    - The nine-year renewal requirement of independent directors will become effective on May 1, 2022.
    - Independent directors appointed before Clause 5.2.3. came into force are grandfathered until May 1, 2022. 74 percent of directors of locally incorporated banks are already in compliance with this requirement.
    - Clause 5.2.4 (2) limits the number of appointments as director of companies listed on domestic and overseas stock exchanges to five for directors, managers, and persons with power of management. All directors are already in compliance with this requirement.
    - Requirement for a risk oversight committee in accordance with Clause 5.4.2. comes into effect on May 1, 2019. As of the assessment date, 5 out of 15 domestic banks have already set up a risk oversight committee; two banks will establish one by December 2018 and the remaining eight banks will be in full compliance by May 2019.
  - The two-year waiting period after discharge before appointment as independent director is at the shorter end of the spectrum.
  - A pilot on behavior & culture (B&C) assessment in four large financial institutions is noted as cutting edge practice.
  - Recommendation: BoT incorporates regular meetings with independent directors as part of its supervisory process.

- Principle 15 (Risk Management Process)
  - BoT supervisors assess institutions’ policies, procedures, and practices with sufficient depth and scope across risk categories.
  - Recommendation: BoT should better articulate supervisory expectations by publishing best practice guides after thematic reviews or where varied practice is observed.

- Principle 16 (Capital Adequacy)
  - BoT regulations reflect Basel standards; BoT assessment of an ICAAP was thorough and consistent.
  - Recommendation: BoT build a more integrated approach towards Pillar 2, starting by developing a methodology to set individual bank capital ratios as part of its risk-based supervisory framework.

- Principle 17 (Credit Risk)
  - Assessors reviewed inspection reports, orders, and recommendations and discussed follow-up with examiners.

- Principle 18 (Problem Assets, Provisions, and Reserves)
  - Examinations are comprehensive and ensure banks have adequate policies/processes for early identification and management of problem assets and adequate provisions/reserves.
  - Provision coverage stands at 140 percent (total provisions/total NPLs) and 170 percent (total provisions/required provisions).
  - Areas for alignment with April 2017 Basel guidelines:
    - Require banks to include a list of indicators to determine the qualitative criterion of unlikeliness to pay in their policies.
    - BoT definition of restructuring and rescheduling should align with forbearance practice, referring to borrower financial difficulty and not conditional on the bank making a loss.
    - Probation period for nonperforming restructured exposures to be upgraded is currently three months; international good practice requires a minimum of one year.
    - No upgrade should take place when restructuring is granted; upgrades only after debtor successfully completes probation period (BoT Notification FPG 5/2559 paragraph 5.2.3 (2)).
    - More detailed guidance on level of application (borrower or transaction) of classification should be included in regulation rather than only in Q&A.
  - BoT issued a revised Asset Classification. After TFRS 9 becomes effective in 2020, asset classification, provisioning and write off shall be in accordance with TFRS 9:
    - Assets classified into 3 classes: performing, under-performing, and nonperforming.
    - For performing assets, provision set against expected credit loss over 12-month period.
    - For under-performing and nonperforming assets, provision set against expected credit loss over the expected life.
  - The revised regulation was not in force at the time of the assessment but is likely to address most recommendations.

- Principle 19 (Concentration Risk and Large Exposure Limits)
  - BoT supervisors review concentration risks adequately.

- Principle 20 (Transactions with Related Parties)
  - Except for credit cards, directors, bank management, and persons with power of management are not permitted to borrow from the bank.
  - Framework regulating related party lending is comprehensive and closely supervised.

- Principle 21 (Country and Transfer Risks)
  - Cross-border activities are increasing; examiners conduct onsite reviews of cross-border offices as warranted.
  - Recommendation: enhance country risk manual with best practices on strategic risk analysis of banks expanding cross-border and link to corporate customer due diligence.

- Principle 22 (Market Risk)
  - Market risk is considered low and is monitored through onsite and offsite activities.
  - Trading income is less than 10 percent of Thai bank earnings. Stress tests do not disclose any significant impacts.

- Principle 23 (Interest Rate Risk in the Banking Book)
  - Fixed car loans funded by floating rate deposits represent the main risk; exposure is small, less than 8 percent of total loans and is housed in banks that BoT judges able to manage the risk.

- Principle 24 (Liquidity Risk)
  - Liquidity is monitored through gap analysis and is mainly derived from deposits. LCR and NSFR have been adopted.

- Principle 25 (Operational Risk)
  - BoT examiners assess operational risk management frameworks comprehensively and in sufficient depth.

- Principle 26 (Internal Control and Audit)
  - Adequate regulatory requirements are in place.

- Principle 27 (Financial Reporting and External Audit)
  - Thai accounting standards are generally in line with IFRS at assessment date.
  - BoT asset classification and provisioning standards for CL/PIL are more conservative than IAS 39; quantitative impact studies show outcomes closer to IFRS 9.
  - In 2020, once TFRS 9 comes into force, financial statements of Thai banks will be fully aligned with widely accepted international standards.

- Principle 28 (Disclosure and Transparency)
  - Adequate requirements are in place.

- Principle 29 (Abuse of Financial Services)
  - Substantial resources applied to AML/CFT; AML/CFT strategy (2017–2021) adopted.
  - 2017 Mutual Evaluation Review by the Asia Pacific Group identified gaps:
    - Beneficial owner identification not always required.
    - No explicit requirement for PEP source of wealth to be identified.
    - Originator and beneficiary information for wire transfers not required for transactions originated by non-customers of the bank.
  - Amendments to AMLA and Ministerial Regulation are in-process to address these issues.

### Recommended actions (selected entries from Table 2)
- Principle 1
  - Where appropriate, the BoT should publish response papers to consultations on important notifications instead of, or in addition to, attaching questions and answers to the notification.
- Principle 2
  - The composition of the FIPC should not include the Director General of the FPO on a permanent basis, but he/she could be added in crisis times.
  - The Secretary-General of the Insurance Commission and the Secretary-General of the Securities and Exchange should be removed from the FIPC.
  - Formalize and enforce rotation policy for supervisory staff; relationship managers should be rotated after three–five years of supervising the same institution/banking group.
- Principle 4
  - Continue reforms to supervise deposit-taking SFIs under the same standards as commercial banks.
- Principle 8
  - Further link benchmarks and analysis results to scope of supervisory activities for individual banks to continue development of risk-focused supervision.
- Principle 9
  - Continue to augment emphasis on qualitative factors, such as adequacy of board policies and risk management when evaluating bank condition.
- Principle 11
  1. Amend Guideline to advance PPA application prior to Weak bank status.
  2. Align FIBA, Guideline and BoT operational views on the application of FIBA Chapter 5.
  3. Medium-term, work with the MOF to narrow definition of public damage in FIBA to reflect actions to be taken in cases of serious deterioration that may lead to possible resolution (such as a 5-rated bank), and that require MOF involvement.

*Source: Chapter content in 1thaea2019001 - Chapter 5 of FIBA provides the BoT with a broad range of possible measures to address*

### 4. Raise expectation for more formal supervisory action and PPA to

### 4. Raise expectation for more formal supervisory action and PPA to banks at the “3” rating level and establish other early financial triggers and qualitative benchmarks for supervisory action.

### Supervisory expectations and recommended actions (Principles cited)
- Principle 14
  - Incorporate regular meetings with independent directors as part of the BoT supervisory process to continue raising awareness of governance and risk culture.
- Principle 15
  - BoT should better articulate supervisory expectations by publishing best practice guides (for example after thematic reviews or when a range of practice is observed), including on risk management and governance, to contribute to BoT’s international standing as a world class prudential supervisor.
- Principle 16
  - Build a more integrated approach towards Pillar 2 by developing a methodology to set individual bank capital ratios as part of the risk based supervisory framework.
- Principle 18 — Areas to revise to align BoT regulations and practices with Basel “Prudential Treatment of Problem Assets—Definitions of Nonperforming Loans and Forbearance—April 2017”:
  - Require banks to include a list of indicators to determine the qualitative criterion of unlikeliness to pay in their policies. (Assessors observed at least one Thai bank has such a list; recommend BoT regulations explicitly require it.)
  - Align BoT definition of restructuring and rescheduling with the definition of forbearance in international good practice; it should refer to financial difficulty of the borrower and should not be conditional on the bank making a loss.
  - Probation period for nonperforming restructured exposures to be upgraded to performing exposures is currently three months; international good practice requires it to be a minimum of one year.
  - No upgrade of the exposure should take place when restructuring is granted (The BoT Notification FPG 5/2559 Regulations on Asset Classification and Provisioning of Financial Institutions paragraph 5.2.3 (2)). Upgrades should be allowed only after the debtor has successfully completed the probation period.
  - Provide more detailed guidance in BoT regulation on the level of application of asset classification (borrower or transaction level). (BoT provided evidence at least one bank applies the definition at the borrower level; regulation should be more explicit.)
- Principle 21
  - Enhance country risk manual by providing best practices examples on strategic risk analysis of banks expanding cross-border and linking back to corporate customers they serve.
- Principle 29
  - Implement amendments to AMLA and Ministerial Regulation once approved by legislature.

### Authorities’ response (paragraphs 50–58) — key positions and actions
- General stance
  - Thai authorities appreciate the comprehensive and positive assessments and constructive dialogues during the FSAP mission.
  - Note assessors’ observations on institutional arrangement and composition of FIPC and reiterate view that institutional arrangement designs are jurisdiction-specific and tailored to experience (no one-size-fits-all).
- FIPC composition and rationale
  - FIPC members: three BoT ex officio members, the Director of the FPO, the Secretary of the OIC, the Secretary of the SEC and five external experts, each with one voting right. Three representatives from MOF and other regulatory agencies are outnumbered by external experts.
  - Authorities view the institutional framework as practical, effective, suitable for Thailand’s context, and not compromising BoT independence.
- Coordination benefits and challenges
  - MOF and other regulatory agencies’ participation in FIPC decision-making is useful for effective oversight of financial stability and for broader economic perspective in recommendations.
  - Challenge in finding knowledgeable, well-experienced FIPC members with no involvement in the financial sector; existing arrangement preserves operational independence while enabling policy harmonization.
  - Noted benefits: timely engagement for coordination in policy-making and crisis management; appropriate checks and balances; capitalization on synergies and harmonization across sectors.
- Macroprudential governance
  - Authorities view macroprudential policy decisions as benefiting from involvement of both the FIPC and the Monetary Policy Committee (MPC) to leverage a holistic macroeconomic view and complementary policy tools.
  - Mandates: MPC primary objective is price stability; FIPC primary objective is financial institution system stability (as stipulated in BoT Act).
- Accountability and transparency measures
  - FIPC accountability assured via biannual report to the cabinet through the Finance Minister (required by BoT Act), public data dissemination, engagement with third party/independent stakeholders on Committee performance, and active engagement with legislative oversight committees.
- Supervisory reforms for SFIs
  - SFIs supervisory framework undergoing major reform to implement supervisory standards for deposit-taking SFIs comparable to commercial banks.
  - Since 2015, BoT strengthened supervisory and regulatory actions of SFIs in governance, credit process, accounting and information disclosure.
  - SFI examination results screen through BoT subcommittee; final examination report submitted to MOF and SFI’s Board.
  - Regulatory formulation process for SFIs is separate from commercial banks: SFIs draft regulations are reported to FIPC only for acknowledgement before submission to MOF for approval.
  - Authorities agree with recommendation to continue reforms to supervise deposit-taking SFIs to the same standards as commercial banks, while considering: (1) SFIs' mandates to fulfill financial gaps and foster economic development; (2) capability and readiness of SFIs; and (3) mutual understanding/agreement among relevant authorities.
- Inter-agency coordination mechanisms
  - Three-Regulator Steering Committee (3RSC) as a platform for regular exchange and coordination among BoT, SEC, OIC; MOF attends regularly. 3RSC meets at least quarterly.
  - 3RSC working group on crisis preparedness includes other agencies such as DPA and FIDF. Authorities are discussing creating an overarching and advisory body for financial stability risks.
- Implementation timeline and priorities
  - Authorities welcome assessors’ recommendations and note alignment with their action plan, including enhancing clarity of internal guidelines for preventive actions, PPA/PCA, and revising regulation on asset classification to be implemented in 2020 once IFRS 9 becomes effective.
  - Aim to continue strengthening supervisory framework in line with international best practice and to promote stability and development of Thailand’s banking sector.

### Insurance sector assessment — scope, methodology, institutional setting, and key statistics
- Assessment scope and basis
  - Assessment benchmarked against IAIS ICPs issued October 2011 including revisions through December 2017.
  - Assessment based solely on laws, regulations, and supervisory practices in place in February 2019. Does not reflect ongoing regulatory initiatives, though some proposals are discussed as additional comments.
  - Authorities provided a self-assessment with examples of supervisory practices (entities not disclosed). Assessors had technical discussions and briefings with Thai officials; no consumer groups were met.
- Institutional framework
  - Three main supervisory authorities: OIC (insurance), BoT (banking), SEC (securities and provident funds). Authorities operate with considerable autonomy and cooperate with some overlap on financial groups and financial stability.
  - OIC leadership and composition: OIC Board includes Permanent Secretaries for Finance and Commerce, Secretary-General of the Consumer Protection Board, Governor of the Bank of Thailand, Secretary-General of the SEC, Secretary-General of the OIC (serves as Secretary and Chief Executive Officer), and at least six (and not more than eight) other members appointed for professional backgrounds.
  - OIC became an independent authority with Insurance Commission Act (ICA) in 2007. Secretary General is Chief Executive and supervises day-to-day insurance business under Civil and Commercial Code, Life Insurance Act 1992 (LIA), Non-Life Insurance Act 1992 (NLIA), and ICA sections 6, 12, 17, and 20.
  - OIC financing: levies on the sector approved by Minister and Cabinet.
  - OIC staffing as of January 2019: total staff 575; central office in Bangkok 389; regional offices 186.
- Industry structure and trends (key numbers preserved)
  - Insurance sector assets: grew from 10 percent of GDP in 2006 to over 22 percent of GDP in 2016, constituting 9 percent of total financial sector assets.
  - Gross premiums written growth: between 2008 and 2017, grown at an average annual rate of approximately 16.9 percent, compared with nominal GDP growth of 9.9 percent during the same period.
  - Insurance penetration ratio (premiums written to GDP): increased from 3.63 percent in 2008 to 5.39 percent in 2017.
  - Thailand is the world’s 29th largest insurance market.
  - Comparison: Singapore insurance penetration 8.75 percent; Colombia 2.87 percent; Peru 1.62 percent; Ecuador 1.99 percent.
  - Number of authorized insurers at end-December 2018: 82 authorized insurers including 6 foreign branch insurers.
    - Composition: 58 non-life insurers, 22 life and pension insurers, and 2 locally established reinsurance companies.
  - Market entry and ownership constraints:
    - Market entry: licensed foreign branches currently 6; no new branches licensed in several years; a moratorium on new licenses (domestic and foreign) has been in place for over 20 years in practice (no official policy).
    - Section 10 of the LIA and Section 9 of the NLIA require Thai nationals to hold at least 75 percent of a public limited company insurer's voting shares and three quarters of the company's directors must be Thai nationals.
  - Foreign ownership and group links:
    - Approximately 25 percent of total industry assets are foreign owned (decreased from approximately 31 percent in 2013).
    - 34 insurance companies have some international participation and are part of international insurance groups: 11 life insurance companies and 23 non-life insurance companies.
    - Approximately 23 insurance companies have equity links to banking groups and non-financial conglomerates.
  - Market concentration:
    - Herfindahl-Hirschman Index: life industry less than 1400 (unconcentrated); non-life industry less than 200 (highly competitive).
    - Largest market share: life industry 26 percent; non-life industry 8 percent.
- Accounting, audit, and actuarial framework
  - TFRS adoption and IFRS timetable:
    - Federation of Accounting Professions (FAP) develops accounting standards with a one-year delay from IFRS effective date; Thai Financial Reporting Standards (TFRS) aligned with the 2016 version of IFRS.
    - TFRS adopted by all insurers in Thailand.
    - Thai insurers preparing to adopt IFRS 9, Financial Instruments, effective in 2020.
    - FAP issuing guideline for insurers who elect to further defer IFRS 9 implementation until IFRS 17, Insurance Contracts, becomes effective in Thailand, tentatively, in 2023.
  - Audit and actuarial requirements:
    - Financial statements of Thai insurance companies must be reviewed or audited by a CPA complying with Thai Auditing standards (which closely follow international auditing standards).
    - Independent auditors must be licensed; licensing requirements include training in insurance business, IFRS, international auditing standards, corporate governance, risk management and internal controls.
    - Independent auditors must use actuaries to review technical accounts and reserves.
    - FAP, under Accounting Professions Regulatory Commission, regulates the audit profession.
    - Central Bank of Thailand requires auditors of all financial institutions to be those approved by the SEC as auditors in the capital market.
    - Licensed actuary required to certify liability valuation annually on both gross and net of reinsurance basis; license issued by OIC and renewed every two years.
    - Qualification for non-life actuary: either fellow of the Society of Actuaries of Thailand or graduated from an Office of Civil Services Commission-approved university and have at least five years of reserving experience.
    - Life actuaries required to be a fellow of the Society of Actuaries of Thailand.

*Source: 1thaea2019001 - 4. Raise expectation for more formal supervisory action and PPA to banks at the “3” rating level and establish other early financial triggers and qualitative benchmarks for supervisory action (IMF staff report excerpt).*

### 17.      The continued growth and stability of the insurance sector is dependent on continued

### 17.      The continued growth and stability of the insurance sector is dependent on continued

### Macroeconomic and sectoral context
- Economic growth is expected to continue in the range of 2–3 percent per annum.
- Economic or political shocks could have significant impacts on these expectations.
- Continued growth and stability of the insurance sector is dependent on continued economic growth and stability of the region, and the broader financial sector.
- The authorities are aware of these issues and are working to maintain a stable environment.

### Life insurance: demographic and product challenges
- Seniors accounted for about 14.2 percent of the national population in 2015 and are expected to grow to more than 25 percent by 2023.
- Thailand's aging population impacts the sale of traditional products.
- Strategic, operational and conduct of business risks must be managed in the development of new products.
- Another continuing challenge is the ability of insurers to match long-duration insurance liabilities with investment instruments in local markets.
- The low interest rate environment: interest rates have declined to levels below what was assumed when many long-term guaranteed policies were issued.
- Bancassurance has been a major driver of premium growth; most products sold through that channel have been guaranteed endowment products, which remain popular in Thailand.
- Life insurers could not perfectly match the duration of their assets and liabilities, causing volatility in earnings, capital requirements and capital resources.
- Life insurers, especially those with guaranteed products, aim to:
  - prospectively offer less guaranteed benefits; and
  - focus on life protection, health protection and unit-linked products to shift investment risks to policyholders.

### Non-life insurance: competition and catastrophe exposure
- The Thai non-life insurance market is intensely competitive with a large number of insurers for the size of market.
- Risk that competition on price, rather than quality of service, could erode underwriting discipline and create solvency problems, particularly for smaller insurers.
- Further industry consolidation may help mitigate these pressures.
- Exposure to natural disasters and catastrophic loss in the region is an important challenge and part of insurer risk management requirements.

### Consumer protection and dispute resolution
- Thailand was ranked 32nd in global competitiveness by the World Economic Forum (WEF); positives included quality of macroeconomic environment, health and primary education, and market size; challenges included inefficient institutions and lack of innovation.
- Although there is no insurance ombudsman, the OIC can arbitrate disputes between the public and insurers.
  - All insurance policies must contain an option (binding on the insurer) for arbitration of claims under the OIC's rules.
  - Decisions of the OIC are binding on the insurer but are not binding on the policyholder.
  - Arbitration cases are expected to be settled within 90 days.
- The Thai General Insurance Association runs an arbitration office focused primarily on motor insurance disputes; four arbitrators are retired criminal and appeal court judges.

### Policyholder protection funds
- Two policyholder protection funds exist to protect policyholders in the event of insurer insolvency.
- Under Chapter V of the NLIA, a "protected fund" is financed by a 0.1 percent levy on the gross written premium for each company.
- OIC guidelines outline rules, procedures and conditions for creditors seeking payments from the fund.
- Each creditor has the right of repayment from the non-life fund; the amount repaid, together with the insurer's reserves deposited with the OIC, must not exceed the amount due under the policy.
- The total repayment amount to any single claimant for all non-life insurance policies with the same insurance company is limited to THB 1 million (US$31,299).
- In 2008 an amendment to Chapter 5 of the LIA established a policyholder protection fund for life insurance companies.
- Neither fund is guaranteed by the state.
- The OIC administers the Protection of Motor Vehicle Accident Victims Act and a separate compensation fund.

### Summary compliance with Insurance Core Principles (ICP) — key observations
- 1. Objectives, Powers, and Responsibilities of the Supervisor
  - OIC authority is clearly defined in primary legislation and focused on maintaining a fair, safe and stable insurance sector.
  - Several key supervisory powers (e.g., to approve licensing decisions) rest with the Minister and/or Cabinet rather than the supervisor.
- 2. Supervisor
  - Many ICP standards are fully addressed; independence and transparency of OIC can be improved and should be made more consistent with international standards.
- 3. Information Exchange and Confidentiality Requirements
  - Supervisor has necessary legislative authority and demonstrates ICP standards in practice.
- 4. Licensing
  - Licensing criteria need updating and application across all industry applicants; corporate/group structure consideration not currently part of licensing.
- 5. Suitability of Persons
  - Requirements for significant owners and real person controlling beneficiaries should be strengthened; consider competency requirements for control functions.
- 6. Changes in Control and Portfolio Transfers
  - Legislation lacks an appropriate definition of control and general provisions requiring ongoing approval of all changes in control (other than foreign shareholders).
- 7. Corporate Governance
  - Corporate governance requirements have been strengthened and appear consistent with ICP.
- 8. Risk Management and Internal Controls
  - Internal control requirements have been strengthened and appear consistent with ICP.
- 9. Supervisory Review and Reporting
  - OIC has made significant progress; some refinements may be required as new regulatory requirements are implemented.
- 10. Preventive and Corrective Measures
  - The ladder of intervention leaves strongest powers until an insurer’s condition is extremely serious, shifting focus to wind-up rather than recovery.
- 11. Enforcement
  - OIC’s enforcement powers should be enhanced to take control of non-life insurers and increase enforcement over intermediaries.
- 12. Winding-up and Exit from the Market
  - Legislation does not specify a clear point prohibiting continued business; partially mitigated by OIC supervisory practice and protection funds.
- 13. Reinsurance and Other Forms of Risk Transfer
  - Compliance observed, but assuring recoverables from large foreign-based reinsurers without a physical presence could be challenging in insolvency.
- 14. Valuation
  - Notifications provide measurement requirements but could be clearer on recognition/derecognition, including for insurance and reinsurance contract receivables and liabilities.
- 15. Investment
  - No comments.
- 16. Enterprise Risk Management (ERM) for Solvency Purposes
  - Expanded notifications on ERM and ORSA were adopted in January 2019.
  - ORSA reporting by insurers won’t begin until 2020.
  - Notification is largely principles-based; variations in compliance and reporting quality can be expected.
- 17. Capital Adequacy
  - Thai solvency regime uses RBC as standard method; currently RBC excludes provisions for operational and catastrophe risks.
- 18. Intermediaries
  - Many COB conduct requirements for intermediaries are new and not yet fully tested; supervisory programs for brokers, agents and insurers are evolving.
- 19. Conduct of Business
  - Many COB requirements are new; time will tell whether they are fully adhered to.
  - Requirements on use of client information are basic and do not guard against misuse for unwanted cross selling.
  - Conflict of interest/disclosure of compensation requirements for agents and intermediaries should be enhanced.
- 20. Public Disclosure
  - Notifications on disclosure enacted in 2018.
  - Notifications do not explicitly require certain ICP 20 disclosures (e.g., sensitivity to market variables, methodology/key assumptions for ALM, financial performance by segment, nature/scale/complexity of insurance contract risks).
  - Notifications require disclosure only of underwriting risks, while audited financial statements contain more comprehensive disclosures.
- 21. Countering Fraud in Insurance
  - New notifications on fraud (2018) enacted and do not go into force until mid-2019.
  - Life Insurance Act amended in February 2019 to increase penalties and sanctions; does not take effect until August 2019.
  - 2018 notifications do not require reporting to OIC of frauds or acts with material impact if rectified within a timeframe deemed appropriate by the audit committee.
- 22. Anti-Money Laundering and Combating the Financing of Terrorism
  - No comments.
- 23. Group-wide Supervision
  - OIC does not serve as group-wide supervisor for any groups; it cooperates with BoT as group-wide supervisor of Thailand-domiciled financial conglomerates and with foreign insurance supervisors.
- 24. Macroprudential Surveillance and Insurance Supervision
  - No comments.
- 25. Supervisory Cooperation and Coordination
  - No comments.
- 26. Cross-border Cooperation and Coordination on Crisis Management
  - OIC does not formally participate in all supervisory colleges or crisis management groups of foreign-based groups operating in Thailand.
  - Contingency plans for firms operating in Thailand on a cross-border basis are not required as a matter of course but may be required on an ad hoc basis.
  - Certain ICP-covered information sharing is not covered by specific local requirement, though may be handled in practice via inter-supervisor communications including colleges.

### Recommendations to improve observance of ICPs — selected actionable items
- 1. Objectives, Powers, and Responsibilities of the Supervisor
  - Amend primary legislation to vest greater power for key supervisory decisions with the OIC; consider transferring powers currently vested in the MOF to the OIC.
- 2. Supervisor
  - Consider:
    - Repealing or revising Section 45 of the ICA to ensure OIC independence and that decisions cannot be suspended without appropriate administrative process (e.g., appeal to the court system).
    - Requiring commission appointments based on candidate qualifications rather than positions in other government organizations to avoid conflicts of interest.
    - Giving the OIC, rather than the Minister, authority to set fee (or contribution) levels on industry.
  - Improve formal accountability by introducing an annual multiyear strategic and operational plan with performance measures and an annual report.
  - Publish more information on the insurance sector in the OIC annual report and elsewhere to meet ICP 2.7.
- 3. Information Exchange and Confidentiality Requirements
  - No recommendation.
- 4. Licensing
  - OIC should continue review of licensing requirements and introduce legislative changes at earliest opportunity.
- 5. Suitability of Persons
  - Include suitability requirements for significant owners and all real person controlling beneficiaries in licensing review to align with ICP standards.
  - Develop more specific competency requirements for heads of control functions (e.g., risk management, compliance).
- 6. Changes in Control and Portfolio Transfers
  - Review control provisions in conjunction with licensing and suitability requirements and make legislative changes at earliest opportunity.
- 7. Corporate Governance
  - As governance requirements are principle-based, OIC should closely monitor application by insurers over the next supervisory cycle.
- 8. Risk Management and Internal Controls
  - OIC should closely monitor application of risk management and internal control requirements over the next supervisory cycle.
- 9. Supervisory Review and Reporting
  - Consider:
    - Documenting and publishing a high-level supervisory framework describing principles, high-level concepts, and core supervisory processes.
    - Developing specific guidance for emerging operational risk areas (e.g., cyber risk) to increase transparency and consistency.
    - Augmenting supervision of COB requirements for insurers and intermediaries over time to include fuller examinations and thematic examinations once new requirements are assimilated.

*International Monetary Fund — Thailand insurance sector assessment excerpt*

### 10. Corrective and Preventative

### 10. Corrective and Preventative Action

### Corrective and Preventative Action
- Recommendation: OIC consider modifying the ladder of intervention to add an additional stage (Stage 5) focused on preparing for the orderly wind-up of the insurer as a gone concern.

### Enforcement
- Recommendations:
  - Current legislation does not include the authority for the OIC to take control of non-life insurers; adding the ability for the supervisor to take control is an important tool to minimize losses when an insurer is headed towards insolvency.
  - OIC proceed to implement proposed legislation to increase the supervisor’s powers over intermediaries including the power to suspend intermediary licences, and issue administrative orders.
  - Consideration might be given, in due course, to require insurers or intermediaries to make restitution for harm caused by inappropriate Conduct of Business.

### Winding-up and Exit from the Market
- Recommendation:
  - Legislation be amended to clearly establish a point at which it is no longer permissible for an insurer to continue its business (e.g., a CAR of less than 100 percent). This could perhaps be tied to a risk-based solvency requirement for insurers and/or the ladder of intervention.

### Reinsurance and Other Forms of Risk Transfer
- Recommendations for the OIC:
  - Consider development of criteria to require domestic insurers ceding material amounts of risk to foreign reinsurers to perform ongoing credit risk assessments of the assuming reinsurers as part of ERM, and not rely solely on credit ratings of reinsurers.
  - Consider development of additional guidance for ceding insurers to use in selecting reinsurers, e.g., in respect of the current requirement that they consider the supervisory regime of assuming reinsurers.
  - Consider, in advance of any actual need, whether and how the legal framework might be strengthened to improve the security of reinsurance recoverables owed to an insolvent domestic insurer from a foreign reinsurer with no domestic presence.

### Valuation
- Recommendation:
  - OIC clarify guidance for the recognition and derecognition of assets and liabilities, e.g., by expanding the references to TFRS in the notifications to indicate that assets for which any aspect of its valuation method is not specified by the OIC, that such aspect is to be handled according to TFRS.

### Investment
- No recommendation

### Enterprise Risk Management for Solvency Purposes
- Recommendations:
  - OIC work with the industry to enhance the overall performance of insurers in respect of these new requirements as insurers embed them into more effective business practices.
  - Once the new ORSA reporting has begun, and at least for several reporting cycles thereafter, the OIC should consider thematic or horizontal reviews to identify outliers in practice, at both ends of the spectrum, and consider workshops with the industry to aim for necessary improvements.

### Capital Adequacy
- Recommendations:
  - OIC improve upon RBC by providing for operational and catastrophe risks.
  - It is understood that the OIC is moving toward “RBC2” and may also increase the RBC calibration confidence levels from 95 percent to 99 percent VaR over a one-year time horizon, once accounting standard setters have adopted pending new requirements for accounting for insurance contracts (expected to be implemented in Thailand in 2023).
  - This may also provide an opportunity for the OIC to study the means and potential impact of adding provisions for operational and catastrophe risks to RBC during the intervening period.

### Intermediaries
- Recommendations:
  - Legislation be amended to require intermediaries to disclose the amount and/or the basis of their compensation to clients.
  - OIC consider establishing a requirement for professional indemnity insurance for insurance intermediaries operating in its market to ensure that the public is adequately protected by intermediary errors and omissions.

### Conduct of Business
- Recommendations for the authorities:
  - Provide additional guidance for insurers and intermediaries on how to deal with potential, perceived, or actual conflicts of interest.
  - Work together with industry associations to develop a notification on the use of client information for cross selling and other ancillary purposes.
  - Consider development of an industry complaint handling system in due course to collect information from all insurers and brokers on the number of complaints they receive, the types of complaints received and how the complaints were dealt with.

### Public Disclosure
- Recommendations:
  - OIC amend the notifications to address, at a minimum, all the risk and factors covered by the principle statements of ICP 20.
  - OIC’s reliance on TFRS and audited financial statements as a backstop for its own public disclosure requirements results in a bifurcated disclosure approach; the OIC should consider revising its disclosure requirements to apply more broadly and explicitly to any risk arising from insurance contracts.

### Countering Fraud in Insurance
- Recommendations:
  - OIC avail itself of the data that will soon be available through fraud databases at insurers and consider a centralized fraud database at the OIC to analyze bad actors and their actions across the sector, identify trends, and work with insurers and industry trade organizations to be more proactive in combatting fraud.
  - OIC amend the notifications to require that any fraud or act that may have a material impact on an insurer be reported to the OIC on a timely basis, whether or not the insurer may have rectified the matter.

### Cross-border Cooperation and Coordination on Crisis Management
- Recommendations:
  - OIC develop criteria to identify groups operating in Thailand on a cross-border basis for which the OIC should require a contingency plan to protect Thailand policyholders, both on a gone and going concern basis.
  - OIC amend notifications to address, at a minimum, all the information required to be shared by the principle statements of ICP 26.

### Authorities’ Response to the Assessment
- Key points:
  - OIC appreciated the assessment against the IAIS Insurance Core Principles and the opportunity to review the insurance regulatory framework of Thailand.
  - OIC agrees with the Assessors’ comments and observations and the recommendations; implementation will be put into practice over the coming years.
  - Thai government’s policy supports insurance supervisor’s independence; government has never interfered with OIC’s policies, operations or supervision of the insurance sector.
  - OIC is amending the Non-Life Insurance Act (NLIA) and the Life Insurance Act (LIA) to align with international standards.
    - Latest amendments of the NLIA and the LIA were approved by the National Legislative Assembly in February 2019, increasing the enforcement powers of the OIC over intermediaries.
    - Other NLIA and LIA amendments, approved by the Cabinet in November 2018, address shortcomings such as the OIC’s power to approve changes in control, improvement of preventive and corrective measures, and specification of a clear point at which it is no longer permissible for an insurer to continue its business.
  - OIC committed to work closely with industry and related stakeholders to ensure effectiveness of new insurance regulations and enhance overall performance of the insurance industry for the benefit and protection of policyholders.

### Annex III — FMIs: Summary Assessment (selected findings)
- BAHTNET and TSD assessed against the PCPMI-IOSCO Principles for Financial Market Infrastructures (PFMI); assessment based on information available in November 2018.
- BAHTNET:
  - High degree of observance with the PFMI and is a sound system.
  - Operated by the BoT; all transactions once settled in BAHTNET are deemed final and irrevocable, as well as bankruptcy remote.
  - BoT has been operating BAHTNET since May 24, 1995.
  - BoT is considering next generation BAHTNET features including ISO 20022 standard and a Proof of Concept (POC) for the use of Distributed Ledger Technology (DLT).
  - Payment System Act effective since April 16, 2018 provides an explicit basis for settlement finality (section 9), collateral protection (section 10), and default management (section 8).
  - Recommendation: further develop coordinated scenarios that deal with the simultaneous disruption of more than one FMI.
- TSD:
  - Largely observant of the PFMI and operates in a sound manner.
  - Sole central securities depository (CSD) and securities settlement system (SSS) in Thailand; established on November 16, 1994 and commenced operations on January 1, 1995 with registered capital of THB 200 million.
  - Provides finality and irrevocable settlement; uses Delivery-versus-Payment one (DvP 1) model for OTC government and corporate bond trades.
  - Settlement of exchange trades (bonds, equities, and derivatives) is conducted in a guaranteed mode with the TCH acting as CCP; TSD not exposed to depositor default risk as TCH bears all counterparty credit and liquidity risks for both securities and funds legs.

*Source: 1thaea2019001 - 10. Corrective and Preventative (excerpt).*

### 12.      While the BoT's exposure to credit risk is limited as it provides intra-day credit to

### 1thaea2019001 - 12.      While the BoT's exposure to credit risk is limited as it provides intra-day credit to

### Collateral framework and credit risk
- The BoT provides intra-day credit on a fully collateralized basis; exposure to credit risk is limited.
- Collateral management system is operated through a link with TSD, which keeps the securities that the BoT accepts as collateral.
- Collateral practices:
  - Assets accepted as collateral are subject to a daily mark-to-market.
  - Haircuts are determined by calculating value at risk at a 95 percent level of confidence.
  - The haircut policy is reviewed on a yearly basis.
  - Procyclicality is limited by the design of the haircut methodology.
- Identified weaknesses and recommendations:
  - BAHTNET accepts as collateral bonds or debt securities issued by SOEs and SFIs.
  - There is no feature to verify that participants do not post their own debt or equity securities as collateral.
  - BAHTNET lacks concentration limits to avoid concentrated holdings that could impair liquidation without significant adverse price effects.
  - Recommended actions:
    - Implement a rule preventing participants from pledging their own securities as collateral.
    - Implement concentration limits.
    - Establish annual independent validation of the haircut procedures.
    - Explore the treatment of assets held by BAHTNET in case of non-availability or insolvency of TSD and address this within BAHTNET's risk management framework.
- Note: haircuts are established "By the Enterprise Risk Management Department."

### Liquidity risk management and intraday liquidity facility (ILF)
- Liquidity risk in BAHTNET is minimized due to the provision of an ILF by the BoT to participants.
- BAHTNET liquidity tools and features:
  - Queuing mechanisms.
  - Gridlock resolution.
  - Securities Requirements for Settlement of net settlement files.
  - Throughput guidelines.
  - Differential pricing fees mechanism that contributes to smoothening payment flows during operating hours.
- Suggested review:
  - Reassess the requirement that larger participants post at the beginning of the day collateral representing 10 percent of the average value of their transactions in BAHTNET, given potential opportunity costs and the potential redundancy if an automated collateral management system exists.

### Settlement finality and exchange-of-value settlement
- Settlement in BAHTNET:
  - Achieved in real-time and in central bank money; payments once settled are final and irrevocable.
  - Articles 40 and 41 of the BAHTNET Regulation define finality as when funds are debited from the sending institution's account and credited to the receiving institution's account.
  - Article 39 allows cancellation of an unexecuted transfer order by participant request and beneficiary consent; unilateral revocation of accepted and unsettled orders is prohibited.
- Exchange-of-value mechanisms:
  - Delivery versus payment (DVP) and payment versus payment (PVP) are used for securities and foreign exchange settlements respectively.
  - Two exchange-of-value settlements in BAHTNET:
    - DVP link between BAHTNET and TSD for government securities and equity settlement.
    - PVP link between BAHTNET and USD CHATS regulated and overseen by HKMA.
  - Securities settlement models:
    - Securities traded on the exchange are settled using a DVP model 3 arrangement ("Securities and funds are settled on a net basis").
    - OTC securities use a DVP model 1 ("Securities and funds are settled on a gross basis").
  - For Thai Baht vs. U.S. dollar transactions, settlement in U.S. dollar is done in commercial bank money; finality of linked obligations is achieved simultaneously upon completion in BAHTNET and USD CHATS.
  - Adoption of these settlement forms has eliminated principal risk.

### Default management
- The BoT has clear rules and procedures defining a default:
  - Reflected in the Payment Systems Act (sections 8 and 10).
  - Reflected in BoT "Procedures for members of highly important payments system to enter business rehabilitation or bankruptcy proceedings."
  - These rules and procedures are publicly available on the BoT webpage.
- The BoT is well prepared to implement default rules and procedures.

### General business and operational risk management (BAHTNET)
- Operational risk framework:
  - Comprehensive framework covering technology, risk factors, human resources, monitoring, control, and periodic testing.
  - PBD (BAHTNET operator) conducts Control Self-Assessments (CSA) focusing on operational risk and reports to the ERMD.
- Recovery and availability targets:
  - Recovery time objective (RTO) of two hours.
  - Recovery point objective of zero data loss.
  - Target system availability set at 99.9 percent for 2018.
  - The BoT has a secondary site with real time data replication and is setting up a third site with a different geographical risk profile.
  - The BoT has a procedure for BAHTNET Offline in case all three sites would be unavailable.
- Key Risk Indicators (KRIs) have been developed to monitor risks, assess severity, and assist in response and prevention.
- Business continuity planning (BCP):
  - BAHTNET BCP is developed in line with relevant regulations and addresses scenarios including natural disaster, riot, epidemic, emergency announcement of special holiday, BAHTNET total system failure, and cyber-attack.
  - Annual market-wide testing is organized; suggested adoption of a holistic approach that considers disaster scenarios affecting operations of more than one FMI.
- Custody risk:
  - Adequately managed since BAHTNET doesn’t invest the collateral and holds it at TSD, an FMI regulated and supervised by SEC.

### Cyber resilience
- The BoT applies the CPMI-IOSCO Guidance on cyber resilience for financial market infrastructures (June 2016) to BAHTNET.
- BAHTNET’s cyber resilience framework incorporates:
  - Five primary risk management categories: governance; identification; protection; detection; and response and recovery.
  - Three overarching components: testing; situational awareness; and learning and evolving.
  - A Cyber Security Incident Response Plan (CSIRP).
  - Strong collaboration with ThaiCERT and EMEAP central banks.
- Cybersecurity practices:
  - Periodic CSIRP testing.
  - Dedicated team for cyber threat intelligence.
  - Annual vulnerability assessments and penetration tests by external entities.

### Access and efficiency
- Access:
  - BAHTNET has fair and open access criteria covering legal, financial, and operational requirements; criteria are detailed in BAHTNET Regulations and BoT Notifications.
  - Only direct participants in BAHTNET are allowed; some direct participants are called associate if they don’t have their own workstation.
- Efficiency:
  - BAHTNET provides RTGS in central bank money, is operationally sound, and facilitates settlement of major retail payments.
  - Operated efficiently with a cost recovery pricing policy.
  - Participants are consulted regularly via BAHTNET Advisory Group, annual satisfaction surveys, trainings, user acceptance, and industry wide tests.
  - Communication standards:
    - BAHTNET uses SWIFT Network and BoTNET/X.
    - Uses SWIFT Fin messages and BAHTNET XML standards to allow non-SWIFT-members to use BAHTNET web service.
    - Migration to ISO 20022 message standards is considered for the next generation system.

### Transparency
- The BoT promotes a transparent disclosure framework for BAHTNET:
  - BAHTNET regulation and sub-regulations are disclosed through the BoT website.
  - Manuals and guidebooks provided to facilitate participants' understanding.
  - The BoT uses the disclosure framework published by CPSS-IOSCO in December 2012.

---

### Key findings and follow up for TSD — General organization and legal framework (Principle 1–3)
- Legal basis:
  - The legal basis for TSD is generally sound and enforceable.
  - The SEA and Tor.Thor 32/2559, TSD Regulations Chapters 100–800, Civil Code, and Commercial Code provide for enforceability of transactions; protection of customer assets in depositor bankruptcy; immobilization and dematerialization of securities; settlement finality; DVP for securities transactions; and bankruptcy remoteness of collateral.
- Improvements needed:
  - Need to improve legal framework to extend protection to securities balances of depositors and customers held in TSD's name in the event of TSD bankruptcy.
  - Under section 225 of the SEA, TSD records securities balances under its own name when accepting deposits; the fate of these balances in bankruptcy requires greater clarity.
  - Recommend an expert legal review of SEA and other laws and potential amendments; TSD may obtain expert legal opinion on whether netting has a sound statutory basis.

### Governance and recovery planning
- Governance:
  - TSD governance arrangements are transparent; board and management roles are clearly described and publicly available.
  - Two independent non-executive directors with capital market expertise are appointed to the board.
  - TSD board submits approvals to the SEC and is independent of the SET board in this respect.
  - The TSD board reviews and approves the risk management framework annually.
- Recovery and wind-down:
  - TSD Board should seek documented guidelines for operationalizing recovery and orderly wind-down plans, including measures to mitigate general business and investment risk; guidelines should be reviewed and endorsed by the TSD Board.
  - Governance could be improved by submitting the board's annual performance review to the SEC for regulatory monitoring.
  - While a high-level recovery and wind-down plan exists, detailed effective recovery tools in line with CPMI and IOSCO guidance should be adopted and tested periodically.
  - Documented operational guidelines should include arrangements to ensure continuity of critical services and orderly winding down, including transferring critical operations and services to an alternate entity.

### Risk management (Principle 4–7)
- Framework:
  - Business departments identify, monitor, and manage risks per the enterprise-wide risk management framework of the SET.
  - TSD board decides risk management limits; framework reviewed annually; RMD of SET reports quarterly to the board.
  - Internal audit of SET assesses implementation and reports to the TSD board.
- Suggested enhancements:
  - Widen scope to include greater focus on recovery and orderly wind-down plans, and general business and investment risk.
  - Adopt detailed recovery tools per CPMI and IOSCO guidance and test them periodically.
  - Document operational guidelines linking size of liquid net assets to the time required to maintain critical operations and services, and measures for raising additional capital.

### Credit, liquidity, and settlement (Principle 8–12)
- Credit and liquidity:
  - TSD is not exposed to credit and liquidity risks in its role as SSS and CSD.
  - OTC bond market uses DVP model 1.
  - For exchange trades, securities settlement is carried out on a free-of-payment basis with TCH as CCP ensuring final settlement occurs only after funds leg is settled.
  - TSD does not allow debit balances in securities accounts; mitigates credit risk.
  - TSD not exposed to financial risks in securities borrowing and lending program as it is only a service provider; TCH undertakes securities borrowing and lending with market participants.
- Settlement finality:
  - Securities settlements are final as soon as the settlement account has been debited or credited.
  - Settlement occurs in real time for OTC bond trades and at a designated time for exchange trades.
  - SEA, ToR.Thor 32/2559, and TSD regulations ensure finality against insolvency proceedings.

### Custody risk and operational resilience (Principle 11, 15–17)
- Custody risk mitigants:
  - Sound accounting processes.
  - End-of-day reconciliation of balances.
  - Comprehensive procedures for creation and deletion of securities in the CSD.
  - Prohibition of overdrafts and debit balances in securities accounts.
  - Internal audit examination.
  - Overall SET group insurance covering custody risk.
- Operational resilience:
  - TSD conducts money settlements for OTC bonds in central bank money.
  - Investors can be provided physical securities on demand after due process; securities clearing and settlement requires book-entry transfer with dematerialization for physical securities.
  - TSD has systems to identify general business risks; quarterly progress reports and financial performance submitted to TSD board.
  - TSD has sufficient liquid net assets funded by equity to continue as going concern if it incurs business losses; assets held to cover general business risk are of sufficient quality and liquidity.
  - Need for documented guidelines linking the size of liquid net assets to duration of maintaining critical operations and measures for raising additional capital; plan should be endorsed by TSD board and tested periodically.
- Investments and segregation:
  - TSD's own assets are invested in high-quality liquid assets by the Investment Committee of the SET board, but investments are held in the name of SET, not TSD.
  - Recommendations:
    - TSD should hold investments of its assets in its own name rather than SET's name to ensure segregation and prevent use for parent claims.
    - TSD's assets should be clearly segregated from securities balances of depositors and customers.
    - TSD should draw up and periodically test a detailed plan to liquidate investments quickly with little, if any, adverse price effect.

### Operational targets and standards
- Operational reliability targets and standards:
  - System availability target set at 99.95 percent.
  - RTO is two hours.
  - ISO 27001 for IT security and ISO 23001 for business continuity management have been implemented.
  - Policies for physical and information security are in place.
  - BCP and a secondary site are in place; BCP tested annually with relevant stakeholders including BoT and TCH.
  - Cybersecurity measures include penetration tests.
  - TSD is adopting CPMI-IOSCO "Guidance on cyber resilience for financial market infrastructures."

*International Monetary Fund — content unit 1thaea2019001 (excerpt).*

### 36.      It is recommended to include specific scenarios and carry out periodic tests to ensure

### 1thaea2019001 - 36.      It is recommended to include specific scenarios and carry out periodic tests to ensure

### Access, Efficiency, and Transparency (Principles 18–24)
- Access
  - The access criteria of the TSD allow for fair and open access to its services based on reasonable risk-related participation requirements.
  - The TSD has publicly disclosed its access criteria and the procedures facilitating the suspension and orderly exit of a depositor that no longer meets the participation requirements.
  - Each individual depositor's performance and compliance is monitored on an ongoing basis by a designated TSD staff member.
- Links and operational risk
  - TSD has a link with TCH to facilitate the settlement of exchange-traded securities.
  - TSD is not exposed to any credit or liquidity risk due to the link arrangement.
  - Link-related operational risks are mitigated through regular IT auditing to monitor compliance and subjecting the link arrangement to BCP and DR testing.
- Efficiency
  - The TSD consults depositors on a regular basis and addresses their needs in service design.
  - Depositors are consulted before making changes to policies or systems through focus group meetings, including fees for TSD services.
  - A customer satisfaction survey is carried out periodically.
  - The TSD board monitors on a quarterly basis the implementation of the business plan, incidents and their management, and operational reliability of the systems.
  - Communication procedures and standards used by TSD include:
    - web browser via HTTPS through a secured network;
    - API messaging allowing depositors to send service instructions to TSD and receive responses;
    - SWIFT messages for confirmation and notification for OTC bond settlement and corporate actions information.
  - ISIN standards are used for identification of securities.
- Transparency
  - The TSD publicly discloses its rules, regulations, and fee structure; system design details are shared with depositors in user manuals.
  - The TSD in August 2018 updated its responses to the CPMI-IOSCO Disclosure Framework for FMIs.
  - The TSD website contains statistics; the TSD provides training and information to its depositors; fees are publicly disclosed.

### Recommendations for BAHTNET (Table 1 — Prioritized Recommendations)
- Principle 5: Collateral and concentration
  - Issue: BAHTNET accepts as collateral bonds or debt securities issued by SOEs and SFIs; no feature to verify participants do not post their own debt or equity securities as collateral.
  - Recommended action: Include in BAHTNET a rule preventing participants from pledging their own securities as collateral.
  - Relevant party: BoT
  - Priority: Short-term, High-priority
  - Issue: BAHTNET doesn’t have concentration limits to avoid concentrated holdings of certain assets where this would impair the ability to liquidate quickly.
  - Recommended action: Implement concentration limits in BAHTNET.
  - Relevant party: BoT
  - Priority: Short-term, High-priority
- Principle 5: Haircuts
  - Current practice: Haircuts determined by ERMD by calculating VaR at a 95 percent confidence level using data covering a long historical time span including stressed periods; volatilities of collateral values calculated as inputs based on number of days required for liquidating collaterals; BoT continuously reviews volatilities and adjusts haircuts.
  - Recommended action: There is a need for an independent review and test of the haircut methodology.
  - Relevant party: BoT
  - Priority: Short-term, Medium-priority
- Principle 7: Collateral mobilization
  - Issue: Larger participants have to post at the beginning of the day collateral representing 10 percent of the average value of their transactions in BAHTNET because there is no automated collateral management system.
  - Suggested action: Develop an automated collateral management system where the account balance would trigger the mobilization of collateral, to limit the opportunity cost for participants.
  - Relevant party: BoT
  - Priority: Medium-term, Medium-priority
- Principle 5: Bankruptcy remoteness
  - Issue: The bankruptcy remoteness of BAHTNET collateral securities balances held in TSD’s name could be questioned because TSD records securities balances under its own name and holds such balances for the depositor/beneficial owner.
  - Recommended action: Explore what would happen to assets held by BAHTNET in case of default of TSD.
  - Relevant parties: BoT, SEC
  - Priority: Medium-priority, Medium-term
- Principle 17: Interdependencies and BCP
  - Issue: Strong interdependencies between BAHTNET, TSD, and TCH should be incorporated more in BCP scenarios.
  - Suggested action: Adopt a holistic approach considering disaster scenarios where operations of more than one FMI would be disrupted.
  - Relevant parties: BoT, SEC
  - Priority: Medium-priority, Short-term

### Recommendations for TSD (Table 2 — Prioritized Recommendations)
- Principle 1: Protection of securities balances and beneficial ownership
  - Issue: If TSD goes bankrupt, there are no statutory provisions protecting securities balances of participants and investors as all securities are held in TSD’s name.
  - Recommended action: Introduce specific provisions in the SEA and other relevant laws to afford protection of depositors' and customers' securities balances in the event of TSD going bankrupt.
  - Relevant parties: TSD, SEC, MoF, Ministry of Law
  - Priority: Medium-term, High-priority
  - Issue: Beneficial ownership rights of securities balances belonging to depositors and investors are not clearly established in the extant legal framework.
  - Recommended action: Undertake an expert legal review of the provisions in the SEA and other relevant laws and introduce suitable amendments based on the review.
  - Relevant parties: TSD, SEC, MoF, Ministry of Law
  - Priority: Medium-term, High-priority
  - Issue: Clarity on legal basis of netting is required.
  - Recommended action: Conduct an expert legal review of extant statutory provisions and introduce suitable amendments if required.
  - Relevant parties: TSD, SEC, Ministry of Finance, Ministry of Law
  - Priority: Medium-term, High-priority
- Principle 2: Board performance review
  - Issue: TSD board undertakes an annual review of its performance, which is not submitted to the regulator.
  - Recommended action: TSD board to submit annual review of board’s performance to the SEC for its review and monitoring.
  - Relevant parties: TSD, SEC
  - Priority: Short-term, Medium-priority
- Principles 3, 15: Risk management, recovery, and wind-down
  - Issue: Risk management framework does not explicitly cover general business and investment risk; detailed effective recovery tools, documented operational guidelines, and measures for raising and infusing additional capital are not part of the high-level recovery and wind-down plan.
  - Recommended actions:
    - (i) Include a greater focus on recovery and orderly wind-down plans; include measures to mitigate general business and investment risk in scope of risk management framework.
    - (ii) Adopt and apply the set of recovery tools provided by the standard setters.
    - (iii) Draw up documented operational guidelines linking the size of liquid net assets and the length of time required to maintain critical operations and services.
    - (iv) Include detailed measures for raising and infusing additional capital.
    - (v) Revised risk management framework incorporating the above elements to be reviewed and approved by TSD board.
  - Relevant parties: TSD, SEC
  - Priority: Short-term, High-priority
- Principle 16: Investment holdings and segregation
  - Issue: TSD’s investments are held in the name of SET and not in its name.
  - Recommended actions:
    - (i) TSD should hold the investments of its assets in its own name to ensure proper segregation and prevent use for setting off claims of its parent.
    - (ii) TSD assets should be clearly segregated from securities balances of its depositors and customers.
    - (iii) TSD should draw up a detailed plan outlining ability to quickly liquidate investments with little, if any, adverse price effect and test the same periodically.
    - (iv) The liquidation plan should be reviewed and approved by the TSD board.
  - Relevant party: TSD
  - Priority: Short-term, High-priority
- Principle 17: BCP and inter-FMI failures
  - Issue: BCP does not appear to include contingency plans to complete securities settlement in event of operational failures of connected FMIs and common participants.
  - Recommended actions:
    - (i) TSD should identify both direct and indirect effects on its ability to process and settle transactions due to external operational failure of connected FMIs.
    - (ii) Capture depositor failure effects, which may be participants in all three FMIs.
    - (iii) TSD should identify, monitor, and manage the risks it faces from and poses to BAHTNET and TCH.
  - Relevant parties: TSD, SEC, BoT
  - Priority: Short-term, High-priority

### Recommendations for Authorities (Table 3 — Prioritized Recommendations)
- Onsite examinations and oversight by SEC
  - Issue: Onsite examinations of TSD by SEC are conducted once every three years.
  - Recommended action: Increase frequency of onsite examinations to once in two years; conduct ad-hoc inspections on need basis.
  - Relevant party: SEC
  - Priority: Short-term, High-priority
  - Issue: SEC does not have a practice of reviewing the performance of the TSD board.
  - Recommended action: SEC to start reviewing the annual performance report of the TSD board to ensure the Board is fulfilling its mandate.
  - Relevant party: SEC
  - Priority: Short-term, High-priority
  - Issue: FMIs are not carrying out periodical self-assessments.
  - Recommended action: Authorities to advise FMIs to undertake periodic self-assessments and review them.
  - Relevant party: SEC
  - Priority: Medium-term, medium-priority

### Key Findings and Follow-Up for Authorities
- Regulation and oversight
  - BAHTNET is subject to appropriate and effective regulation, supervision, and oversight by the BoT.
  - In 2013, the PSC identified BAHTNET as a Systemically Important Payment System (SIPS) and started using the PFMI to oversee BAHTNET.
  - The Payment System Act clearly defined and publicly disclosed criteria used to identify important payment systems including SIPS.
  - The BoT Act and the Payment System Act give the BoT powers to collect information, perform assessments, induce change, or enforce corrective action.
- SEC powers and resources
  - The powers of the SEC are laid down in the SEA and the Derivatives Act (DA) and are considered sufficient.
  - Amendments to the SEA since the previous FSAP have enhanced SEC powers to regulate and supervise TSD and TCH.
  - TCH and TSD are required to report to the SEC on any material changes in their computer systems and in their financial conditions relating to clearing, settlement, and depository services.
  - Powers to conduct onsite examinations and impose sanctions are set out in the SEA, DA, and Tor.Thor.32/2559.
  - The staff and funding resources of the SEC are adequate to discharge its responsibilities as a supervisor and regulator.
- Recommended supervisory practices
  - SEC should review and increase frequency of onsite examinations to two years from three years and undertake ad-hoc onsite examinations as necessary.
  - SEC should advise FMIs to undertake periodic self-assessments against all relevant principles as part of comprehensive FMI safety and efficiency review; these self-assessments should be reviewed by SEC.
- Disclosure and cooperation
  - Authorities disclose main laws and policies on FMIs; BoT discloses policies publicly with respect to BAHTNET; SEC’s objectives are publicly disclosed on its website; information available in English and Thai.
  - BoT and SEC appropriately cooperate in regulation, supervision, and oversight of FMIs via a MoU that:
    - Acknowledges statutory responsibilities and outlines sharing of information;
    - Facilitates communication on policies and development plans for BAHTNET, TCH, and TSD;
    - Covers legal, regulatory, and system changes; monitoring of participant liquidity risk; planning onsite assessments and sharing information; incident handling and crisis management for interdependencies between FMIs; and system-wide BCP testing covering all FMIs.
  - Cooperation includes formal meetings usually held on an annual basis, supplemented by ad-hoc meetings in urgent situations; contact persons of SEC and BoT are identified.

### Authorities’ Response to the Assessment
- General
  - Bank of Thailand (BoT) and Securities and Exchange Commission (SEC) appreciate the assessments and constructive dialogue during the FSAP mission and the opportunity to identify areas for further improvement.
- BoT responses on BAHTNET recommendations
  - BoT is improving collateral framework to prevent wrong-way risk and establish concentration limits.
  - Conclusion reached that guaranteed SOE bonds are equivalent to government bonds in terms of risk; concentration limits will be implemented for non-guaranteed SOE bonds only.
  - For other asset types, BoT will closely monitor and may consider concentration limits if likely to create overall concentration risk.
  - BoT will establish a methodology validation team to perform an independent review and test of the haircut methodology.
  - BoT will conduct an impact analysis on developing an automated collateral management system and consult stakeholders, considering opportunity cost and risk management impacts for BoT and participants.
  - To strengthen BCP, BoT has discussed operating from backup sites during normal working day and adopting holistic disaster scenarios where operations of more than one FMI would be disrupted; scenario will include usage of offline procedure for higher resiliency in the future.
  - BoT welcomes assessors' recommendations and aims to continue strengthening supervisory framework in line with international best practice.
- SEC responses on TSD recommendations
  - SEC has continuously developed and benchmarked against international standards and best practices; since PFMI (April, 2012) SEC reviewed legislative framework, changed regulations, and published policies to comply with PFMI and engaged TCH and TSD for improvements.
  - SEC acknowledges TSD is broadly compliant with PFMI and operates soundly; SEC will reinforce TSD operational policies and responsibilities through developed action plans.
  - On netting arrangement: SEC notes Civil and Commercial Code and Bankruptcy Act provide legal support of bilateral netting transaction; SEA provides enforceable legal binding on novation process or counterparty obligation of the clearinghouse per clearinghouse rules. There is high degree of legal certainty for bilateral netting arrangement currently used by TCH for clearing transactions traded on SET. If clearinghouses want to use multilateral netting in future, expert legal opinion should be obtained before implementation.

_Imf staff report content unit: 1thaea2019001 - 36.      It is recommended to include specific scenarios and carry out periodic tests to ensure_

### 1.      The SEC has significantly improved its level of implementation of the IOSCO Objectives

### 1.      The SEC has significantly improved its level of implementation of the IOSCO Objectives and Principles of Securities Regulation

### Key Improvements and Immediate Recommendations
- Amendments to the SEA:
  - empowered the SEC to bring and enforce civil actions for violations;
  - improved the rights of minority shareholders;
  - strengthened protection of investor assets;
  - provided the SEC with greater authority to cooperate with foreign regulators.
- Thai Office of Auditor General decision:
  - State Owned enterprises (SOEs) listed on the SET will be audited by licensed auditors rather than by the Thai Office of the Auditor General, enhancing the credibility of such audits.
- Recommended actions following SEA amendment:
  - undertake a comprehensive review of the SET rules;
  - further amend the SEA to enable the SEC to institute civil proceedings for any violation of the SEA or SEC regulations and to enhance the SEC’s operational independence.
- Market and market-practice recommendations:
  - direct the Thai Bond Market Association (TBMA) to revise its rules on pre-trade quotes and require same-day indicative quotes;
  - develop a roadmap to implement mandatory centralized clearing of OTC derivatives contracts.

### Assessment Timing, Scope, and Methodology
- Assessment conducted: February 2019 (as part of the FSAP conducted jointly by the IMF and the World Bank).
- Previous IOSCO assessment of Thailand: 2009.
- IOSCO standards applied:
  - IOSCO Principles as approved in 2010;
  - IOSCO Methodology dated May 2017.
- Materials used:
  - detailed self-assessment prepared by the SEC and extensive supporting documents voluntarily provided by the SEC;
  - detailed examination of applicable Thai law, including the Securities Exchange Act of 1992, as amended ("SEA"), the Derivatives Act of 2003 ("DA"), the Trust for Transactions in Capital Market Act (“Trust Act”), the Public Companies Act (“PCA”), several government-wide laws, several Thai Royal Decrees, and numerous SEC regulations, guidelines and interpretative statements.
- Engagements and information sources:
  - detailed meetings with SEC staff to discuss each principle;
  - meetings with staff from the Bank of Thailand, the Fiscal Policy Office of the Ministry of Finance, senior executives of the SET (including TFEX and the TSD);
  - extensive meetings with representatives of every sector of the Thailand capital market.
- Assessment team: Jonathan Katz and Vicente Lazen (World Bank external experts).

### Regulatory and Institutional Structure—Overview
- Primary regulator: the SEC; statutory basis: the SEA (created in 1992; amended six times).
- Scope of SEC authority:
  - comprehensive authority over all segments of the capital markets and functional areas including underwriting, asset management, and retail sales;
  - authority to suspend trading, delist companies, halt trading in specific stocks or the entire market, and take disciplinary action against member firms and employees.
- Other relevant statutes and roles:
  - Derivatives Act of 2003: legal structure for derivatives trading under SEC regulation; BoT has regulatory authority over OTC trading in currency and interest rate contracts.
  - Ancillary laws: The Royal Enactment on Special Purpose Jurisdiction Persons for Securitization B.E. 2540 (1997), the Public Limited Companies Act, B.E. 2535 (1992) and the Licensing Facilitation Act, B.E. 2558 (2015).
  - MoF retains final authority over issuance and revocation of licenses by the SEC, and issuance of Ministerial Regulations.
- Securities Exchange of Thailand (SET):
  - SET authorized by the SEA and is the sole securities exchange in Thailand under the SEA;
  - SET Group entities: SET, MAI (minimum paid-up capital THB 50 million), TFEX, TSD, and the TCH (provides clearing service to securities and derivatives).
  - Memorandum of Understanding between the SEC and SET provides guidance on performance of duties and SEC oversight authority.
- Thai Bond Market Association (TBMA):
  - established in 2005 as a trade association under the Trade Association Act and, under the SEA, as an association related to the securities business;
  - TBMA functions: supervise members, provide a database of all trades done by its members, act as a pricing agency in the debt securities market, serve as an industry forum;
  - SEC has delegated monitoring and surveillance duties to the TBMA; TBMA authorized by the SEC to carry out enforcement procedures when detecting unfair trading practices.

### Market Structure and Key Market Statistics
- Market completeness and depth:
  - active participation of retail, institutional and foreign investors;
  - SET Group provides exchange platforms for stocks, debt instruments, exchange-traded funds and derivative contracts.
- Equity market metrics:
  - market capitalization of THB 17 billion (US$541 billion), 107 percent of GDP (contextual statement);
  - initial public offerings have averaged 20 per-year in the past several years.
- Asset management and mutual funds:
  - more than 25 asset managers and 1,382 mutual funds with total assets of THB 4.68 trillion (US$150 billion);
  - mutual fund assets represent approximately 34 percent of GDP;
  - 3.11 million unitholder accounts.
- SET market composition and activity (2018 and related figures):
  - 704 companies listed on the SET (545 on the main board and 159 on the MAI) (2018);
  - total market cap of SET-listed companies: US$500 billion (2018);
  - highest daily trading value of ASEAN markets: US$1.7 billion (2018);
  - 35 SET listed companies are included in the MSCI Standard Index.
- Initial public offerings:
  - 2017: 22 new SET listings, 17 MAI listings and 6 REITS;
  - 2018: 8 new SET listings, 11 MAI listings and 3 REITs.
- TFEX product development and growth:
  - first product (SET-50 index future) in 2006;
  - TFEX added futures on individual securities, gold, rubber, interest rates and U.S. dollars; also SET-50 index options and sector-index futures;
  - 13.7 percent increase in contracts traded in 2017 over 2016;
  - contract-specific growth in 2017 over 2016: single stock futures 40.4 percent, Baht gold futures 28.6 percent, SET50 stock index contracts 152.3 percent.
- Investor composition and trading contributions:
  - retail investors estimated to account for 48 percent of daily SET trading value and 51 percent of daily TFEX trading value;
  - 1.5 million registered investor accounts on the SET, with approximately 600 investors accounting for most of daily retail investor trading;
  - foreign investors account for approximately 30 percent of daily trading value;
  - domestic institutional investors account for 11 percent;
  - proprietary trading by brokers accounts for 10.4 percent.
- Bond market metrics:
  - total outstanding value of the Thai bond market at end-2018: THB 13.06 trillion;
  - composition of outstanding value: government bonds 37 percent, corporate bonds 28 percent, BoT bonds 26 percent, SOE bonds 8 percent, foreign bonds 1 percent.
- OTC trading dominance in bonds:
  - around 99 percent of the THB 19,312 billion traded in bonds in the secondary market are negotiated OTC (not considering financing related transactions);
  - dealer-client trading accounts for over 80 percent of the trading value in the OTC market.
- Selected historical market figures (from tables and text):
  - Total market capitalization (SET and mai) by year (billion THB): 13,715.68 (2014), 11,994.23 (2015), 14,783.60 (2016), 17,273.88 (2017), 16,434.25 (2018) with parenthetical "(USD 500)" shown in the source;
  - Total trading value (billion THB and USD) for OTC bond trading: 18,867.21 (USD 572) (2014), 19,653.84 (USD 596) (2015), 22,409.45 (USD 679) (2016), 22,046.71 (USD 668) (2017), 19,312.90 (USD 585) (2018);
  - Government debt securities OTC trading values (billion THB and USD): 18,238.42 (USD 553) (2014), 18,826.67 (USD 571) (2015), 21,330.60 (USD 646) (2016), 20,783.09 (USD 630) (2017), 18,183.00 (USD 551) (2018);
  - Corporate bonds OTC trading values (billion THB and USD): 592.56 (USD 18) (2014), 807.69 (USD 24) (2015), 1,056.87 (USD 32) (2016), 1,241.59 (USD 38) (2017), 1,117 (USD 34) (2018).
- Market capitalization growth claim:
  - market capitalization of the SET grew from THB 13 billion in 2014 to 17 billion in 2018 (textual statement).
- Financial intermediaries and licensing:
  - about 40 licensed financial intermediaries in Thailand;
  - the SEC issues specific licenses for each function; most firms are licensed in all functional business;
  - foreign-owned subsidiaries dominate the market: 17 foreign-owned bank subsidiaries account for 54 percent of total market share, five largest account for 19 percent;
  - nine firms owned by domestic banks represent 26 percent of the market share;
  - twelve independent domestic firms account for 20 percent of the market share;
  - among 39 securities companies that perform as securities brokers, majority are foreign subsidiaries with a market share of 50 percent.
- Number of financial intermediaries by business (Table 3 data):
  - Brokers: 38 (2016), 39 (2017), 39 (2018);
  - Dealers: 35 (2016), 35 (2017), 36 (2018);
  - Underwriters: 39 (2016), 40 (2017), 41 (2018);
  - Investment advisors (derivative business): 40 (2016), 41 (2017), 43 (2018);
  - Agents: 42 (2016), 40 (2017), 39 (2018);
  - Dealers (derivative business): 8 (2016), 8 (2017), 9 (2018);
  - Investment advisors (other row): 1 (2016), 1 (2017), 1 (2018).
- Revenue composition for licensed securities companies (2018):
  - Commission fees from clients: 71 percent;
  - Proprietary trading: 17 percent.
- Asset management structure:
  - 25 licensed management companies; 71 licensed distributors of collective investment schemes;
  - six largest asset management companies are owned by Thai banks;
  - distributors include 19 banks, 30 brokers, 6 fintech companies, 11 insurance companies, and 4 other companies.
- Mutual fund counts (Table 4):
  - CIS operators: 24 (2014), 25 (2015), 25 (2016), 25 (2017), 25 (2018);
  - Mutual funds: 1,540 (2014), 1,422 (2015), 1,492 (2016), 1,431 (2017), 1,497 (2018).
- Privately-held pension funds (2017):
  - 16 provident fund managers offering 413 funds, contributions from 18,704 companies, total assets THB 1.1 trillion (US$37 billion) or 7 percent of GDP;
  - 24 private pension fund managers of 4,707 private funds holding assets of THB 841 billion (US$28 billion) or 5.4 percent of GDP.

### Preconditions for Effective Securities Regulation
- Legal and accounting frameworks:
  - Thailand has adopted IFRS and international audit standards (IAS) by incorporation into Thai accounting and auditing standards, although incorporation of new standards into the Thai system appears to entail significant delay.
- Tax and regulatory uncertainty:
  - Thailand is in the process of revising its tax laws applicable to collective investments, creating a significant degree of uncertainty for Thai mutual funds.
- SEA amendment status:
  - Thailand recently enacted amendments to the SEA, which could not be considered in this assessment;
  - the amendment that is not yet effective incorporates several duties and requirements for the SET: obligation to maintain sufficient financial resources, adequate trading systems and systems for recording and disseminating price information, for surveillance, and for securities clearing and settlement;
  - the amendment imposes the obligation on the exchange to issue rules applicable to its members and to listed issuers;
  - provision grants the SEC Board powers to instruct the SET to amend, modify or revoke any of the undertakings carried out by the SET to comply with these obligations.

### Main Findings
- Principles for the Regulator:
  - SEC’s responsibilities, powers and authorities are clearly defined and objectively set out in Thai law;
  - SEC has a stable source of funding and appears to have adequate resources;
  - comprehensive procedures for promoting regulatory transparency and high professional standards for staff;
  - developed and operationalized internal and cross-agency programs to address systemic risk, regulation perimeters, and conflicts of interest;
  - potential for political interference in operating decisions continues to exist under Thai law (no indication this is occurring);
  - recommendation: amend the SEA to eliminate possibility of external interference in operating decisions and enhance enforcement remedies by expanding forms of misconduct addressable through civil litigation.
- Principles for Self-Regulation:
  - SET, TFEX, and TBMA have SRO arrangements covering regulatory practices and supervision and disciplinary actions over their members, adequately overseen by the SEC;
  - arrangements with the SET and TBMA currently rely only on MOUs to exercise SEC supervisory and regulatory mission; recent SEA amendment will partially remediate this shortcoming;
  - SEC lacks statutory authority to suspend or terminate the license of the SET or impose monetary penalties for SET misconduct.
- Principles for Enforcement:
  - SEC has broad comprehensive authority to conduct inspections and investigations, including authority to obtain books and records or compel testimony;
  - 2016 amendments to the SEA authorizing SEC civil actions in specified important areas is a significant improvement, but expanded authority over all violations of the law is needed;
  - SEC lacks authority to take action against the SET if it violates the SEA;
  - SEC inspections appear to be of high quality, but a greater number of periodic onsite securities firm inspections are needed to achieve a full cycle in a reasonable period of time;
  - the number of issuer disclosure reports reviewed under the RBA methodology appears low;
  - the SEC should have real-time surveillance capacity across all financial markets during periods of market turbulence to effectively fulfill systemic risk responsibilities, oversee SRO surveillance effectiveness, and analyze patterns of market misconduct that may cross markets.

*Source: IMF/World Bank FSAP assessment of Thailand (February 2019).*

### 29.      Principles for cooperation in regulation. Issues identified in the previous FSAP have been

### Principles for cooperation in regulation. Issues identified in the previous FSAP have been addressed.

### Cooperation and information sharing
- The SEC is empowered by the SEA to share public and non-public information with domestic and foreign counterparts and also is authorized by the SEA to establish information sharing mechanisms.
- The SEC is a signatory of the IOSCO MMoU.
- The SEA gives powers to the SEC to provide assistance to domestic and foreign regulators.

### Principles for Issuers
- The SEA provides the SEC with ample powers to monitor, oversee and discipline issuers and all entities and persons with responsibilities in public offerings.
- The SEC has a supervisory program to review financial reporting and material information, although it should analyze more company reports.
- The SEA, the PCA, the SEC rulings, and rules provide an appropriate framework for changes of control transactions to be conducted fairly and with full disclosure.
- The SEC should consider requiring public issuers to have internal policies applicable to transactions by company insiders (while not a requirement under the IOSCO Principles).
- The SEC proxy statement disclosure requirements are not specific on the information to disclose in relation to the matters to be voted in shareholders meetings, for instance information on candidate directors’ interests in the issuer, compensation from the issuer or past relationships.
- Financial statements to be included in the prospectus and in the annual and semi-annual reports are prepared according to TFRS which are fully aligned with IFRS, although IFRS on financial instruments is yet to be adopted.
- Each new IFRS is issued as a TFRS after a one-year delay, a time window that should be reduced.

### Principles for auditors, credit rating agencies, and other information service providers
- Auditors are subject to adequate levels of oversight by the SEC and they are required to follow international standards applicable to auditors and the regulation guarantees adequate independence of audit firms and their personnel.
- The SEC’s approved auditors are required to perform their audit work according to the Thai Standards on Auditing set out by the FAP following the ISA standards.
- The CRAs are licensed and regulated by the SEC and are expressly required to follow the IOSCO CRA Code of Conduct.
- The SEA, the SEC regulation and the ASCO standards conform a comprehensive regulatory framework applicable to firms providing advice to investors as well as their personnel.
- Specific standards are applied to sell-side research analysts and their employers.

### Principles for collective investment schemes
- There is a comprehensive system for licensing of fund operators and approval of CIS and for continuing oversight of the activities of the fund and its operator, including regular reporting and onsite inspection.
- The TBMA pricing information is the standard utilized by all mutual funds for illiquid issues of debt securities.
- The TBMA daily yield curve utilizes non-binding indicative quotes for thinly traded issues of government securities; this is not sound practice as indicative quotes have limited reliability in a secondary market.
- The SEC has adopted regulations for hedge funds; hedge funds are created under the general mutual fund licensing and registration regulations as a specialized category of mutual fund: ultra-high net worth accredited investor ("UI") mutual fund.

### Principles for market intermediaries
- The SEA and SEC regulations establish licensing requirements applicable to securities intermediaries, such as minimum paid-up capital, sound financial status and policies and measures for internal controls, risk management, dealing with conflicts of interest (COI), and for preserving confidentiality.
- Requirements also include provisions for all directors, managers and major shareholders of the firms.
- Prudential and solvency requirements are regulated by the net capital rule, which takes into account financial risks, liquidity risks and operational risks on a continuous basis.
- The SEC establishes standards for business conduct of intermediaries undertaking securities and derivatives businesses, in relation to appropriate management and organizational systems, as well as sufficient personnel to be able to operate efficiently and with due care, taking into account the nature and size of the business and associated risks.
- The SEC has implemented early warning systems and procedures for dealing with failing firms.
- The SEA does not provide the SEC with authority to appoint or request a competent authority to appoint a temporary receiver for an intermediary that has suffered a major failure.

*Source: IMF staff assessment text (paragraphs 29–33).*

### 34.      Principles for the Secondary Markets. Real-time surveillance of the securities markets is

### 1thaea2019001 - 34.      Principles for the Secondary Markets. Real-time surveillance of the securities markets is

### Surveillance, SROs, and SEC access
- Real-time surveillance of the securities markets is the responsibility of the SRO.
- The SEC does not have direct real-time access to SRO surveillance systems; it receives a detailed electronic file of all SET and TFEX trading data on a two-month delayed basis.
- The SET, TFEX, and the TBMA provide more rapid trading information when requested by the SEC or when a referral is made to the SEC of suspicious trading activity.
- The SET and TFEX Surveillance units operate from the same facility but the two Surveillance functions are separate, with only specified persons in each unit authorized to access the other surveillance system.
- Recommendation: The SEC should obtain real-time online access to SRO surveillance systems and create its own surveillance program to augment and complement the current SRO programs.
- Recommendation: Consideration should be given to merging the SET and TFEX surveillance programs.
- Recommendation: The TBMA surveillance and enforcement programs should be examined carefully.

### Market structure, trading behavior, and reporting quality
- Daily trading on the SET is largely conducted by retail investors engaging in short-term trading, and licensed intermediaries rely heavily upon client commissions for revenue.
- Recent amendments to the SEA provide the SEC with legal authority to review and approve all SET trading and operations rules.
- Recommendation: Conduct a comprehensive examination of all SET trading rules (e.g. trading restrictions, minimum client commissions, block trading rules) and their interaction and influence on the common trading practices on the SET.
- In OTC bond reporting: 80 percent of daily reported trading is dealer to customer transactions, of which 62 percent is trading between a dealer and a mutual fund.
- Concern: There may be serious validation issues with dealer-customer trade reporting, which accounts for 80 percent of daily trading.
- Recommendation: TBMA should revise its rules on pre-trade transparency in the OTC bond market and require same-day quotes on a continuous basis.
- Observation: TBMA pricing information is the standard utilized by all mutual funds for illiquid issues. The TBMA daily yield curve utilizes non-binding indicative quotes for thinly traded issues of government securities. This is not sound practice as indicative quotes have limited reliability in a secondary market.

### Clearing, counterparty risk, and derivatives
- The SET, TFEX, and TCH monitor risks of their members (at member level) and have put in place measures to identify, monitor, and evaluate large exposures.
- The TCH has tools to manage exposures by its members by requiring collateral according to the risk assumed by them.
- Short-selling is regulated and naked short-selling prohibited.
- Exchange traded derivatives are cleared through TCH while OTC traded derivatives are not.
- Authorities believe the size of the OTC derivatives market segment is not large enough to make centralized clearing mandatory.
- Recommendation: The SEC and the BoT should begin the process of developing a workplan for requiring centralized clearing of OTC derivatives.
- Recommendation: The SEC and the BoT should develop a roadmap for mandatory centralized clearing of OTC derivatives.
- Recommendation: The SEC and BoT should consider requiring the complete and irreversible dematerialization of all listed securities.
- Recommendation: The SEC should give consideration to requiring the TCH the individual accounting segregation of collateral from the participants’ customers on an individual basis to facilitate portability in case of a participant ́s failure.

### IOSCO Principles—summary findings (selected)
- Principle 1: The law provides a clear statement of the responsibilities of the SEC and generally defines the authority of the SECB to develop policy and regulations and the authority of the staff under the direction of the SG to implement policy and perform all operational responsibilities.
- Principle 2: The impact of the MOF having final approval over licensing and revocation decisions continues to be an issue. While there is no evidence that SEC operational decisions have been affected, the potential continues to exist. Operational independence issues are also raised by the composition of the Criminal Fining Committee (CFC) and the Civil Sanctions Committee (CSC).
- Principle 3: SEC legal authority is generally sufficient, with one limitation being that SEC civil enforcement authority is available only for specified forms of misconduct. SEC budgetary and staff resources appear to be sufficient, although consideration should be given to increasing the number of staff assigned to onsite inspections of licensed intermediaries and to the review of periodic reports filed by public companies.
- Principle 6: The internal SEC structure is operational and appears to be an effective tool for monitoring systemic risk. The SEC should work with the BoT and OIC on adoption of a routine procedure for sharing information on entities that are related or subject to joint regulation.
- Principle 9: The SET and TBMA have SRO arrangements; oversight by the SEC relies on MOUs—recent SEA amendment will remediate this shortcoming as it pertains to SEC authority to review and approve SET trading and operating rules. There is room for improvement in the TBMA oversight practice of the Thai bond market and member compliance with trade reporting requirements.
- Principle 10: The SEC has broad comprehensive authority to conduct inspections and investigations, including onsite inspections and authority to obtain books and records or compel testimony.
- Principle 11: Amendments authorizing SEC civil actions in important areas are significant improvements, but broader authority is needed so civil enforcement can be used for all violations of the SEA and DA. The SEC also lacks authority to take action against the SET if it violates the SEA.
- Principle 12: SEC inspections appear to be of high quality. A greater number of securities firm inspections are needed; the number of issuer disclosure reports reviewed under the RBA methodology appears low. Civil enforcement authority is a useful addition but experience is limited to 2 years.
- Principle 16: The SEA provides ample powers to monitor, oversee and discipline issuers. The SEC has a supervisory program on financial reporting and material information, although it should analyze more company reports.
- Principle 18: Financial statements must be prepared according to TFRS which are fully aligned with IFRS. Each new IFRS is issued as a TFRS after a one-year delay. IFRS on financial instruments is yet to be adopted.
- Principle 27: The TBMA yield curve practice (use of non-binding indicative quotes for thinly traded issues) is not sound.
- Principle 32: The SEC has implemented early warning systems and procedures for dealing with failing firms, but does not have the authority to appoint or request the appointment of a temporary receiver for an intermediary that has had a major failure and cannot take control of customers’ assets before a receiver is appointed or as an emergency action.
- Principle 33–36: SET and TFEX have reliable trading arrangements overseen by the SEC, though reliance on MOUs exists for SET. Current practice in SET and TFEX provides adequate pre-trade and post-trade transparency. In the OTC bond market, there is no pre-trade transparency.
- Principle 37: Central clearing for OTC derivatives is not mandatory given authorities’ assessment of market size; central clearing addresses systemic risks from bilateral clearing and is consistent with IOSCO Principles and international best practices.
- Principle 38: Principle not assessed.

### Recommended action plan (selected items, preserving language)
- Principles 2 and 3: Amend the SEA to transfer final approval on licensing to the SEC. Closely examine operational independence issues raised by composition of Criminal Fining Committee and the Civil Sanction Committee.
- Principles 3, 11, and 12: Amend the SEA to authorize the SEC to bring civil enforcement actions for any violation of the SEA and DA.
- Principle 4: The SEC should consider expanding its use of interpretive and explanatory guidance and undertake to make public all guidance provided to one or a limited number of persons or entities.
- Principle 6: The SEC should work with the BoT and OIC on adoption of a routine procedure for sharing information on entities that are related or subject to joint regulation.
- Principles 6, 10, 12, 34, 36: The SEC should have real-time access to SRO surveillance systems providing access across all financial markets during periods of market turbulence to effectively fulfill its systemic risk responsibilities, to effectively oversee the effectiveness of SRO surveillance activities and to analyze patterns of market misconduct that may cross markets.
- Principle 9 (multiple): The SEC ́s powers to regulate the SET as an SRO should be expressly stated in the SEA; the SEC should be given authority to suspend, fine or revoke the SET license; examine the TBMA policy of not disclosing disciplinary sanctions to determine consistency with SEA policy on publication of sanctions.
- Principle 10, 12, 16: The SEC should increase the number of company reports analyzed.
- Principle 16: The SEC should consider implementing common processes between areas reviewing qualitative and quantitative aspects of issuer disclosure reports.
- Principle 17: The SEC should be more specific in the regulation of proxy statement disclosures requirements on the information to provide in relation to the matters to be voted in shareholders meetings; SEC should consider requiring public companies to establish internal policies in relation to trading by insiders.
- Principle 18: The time length for the adoption of each new published IFRS should be reduced; the SEC should increase the number of financial reports analyzed.
- Principle 19: Listed SOEs should be audited by SEC-licensed auditors instead of the Thai Office of the Auditor General; consider pecuniary sanctions for audit firms.
- Principle 22: The SEA should provide the SEC with explicit authority to regulate CRAs.
- Principle 27: The TBMA yield curve should not be based in part on non-binding, indicative quotes.
- Principle 32: The SEA should be amended to provide the SEC with authority to appoint or seek the appointment of a temporary receiver for an intermediary that has failed or to take control of customers assets before that appointment or as an emergency action.
- Principle 32, 37: Consider requiring TCH individual accounting segregation of collateral from participants’ customers on an individual basis to facilitate portability in case of a participant ́s failure.
- Principle 33: The SET should consider conducting and disclosing an analysis of the economic rationale behind its fees structure; the SEA should be amended to enable the SEC to take disciplinary action against the SET, including fines and other remedial actions.
- Principle 33, 36: The SEC should undertake a comprehensive review of the SET trading rules, including share pricing and the minimum uptick rule to assess the impact on market trading.
- Principle 34, 35: The SEC should require that TBMA revise its rules on pre-trade transparency in the OTC bond market and require same-day quotes on a continuous basis.
- Additional (not required by IOSCO Principles): The SEC may consider setting out specific regulations on block trading (Big Lot), such as the minimum size of large trades eligible for block trading, and the price conditions that would guarantee a close alignment with market prices.
- Principle 37: The SEC and the BoT should develop a roadmap for mandatory centralized clearing of OTC derivatives.
- Principle 37: The SEC and BoT should consider requiring the complete and irreversible dematerialization of all listed securities.

*Source: 1thaea2019001 - 34.      Principles for the Secondary Markets. Real-time surveillance of the securities markets is*

### 35.      The Securities and Exchange Commission of Thailand (SEC) welcomes the assessment

### 1thaea2019001 - 35.      The Securities and Exchange Commission of Thailand (SEC) welcomes the assessment

### SEC response and overall assessment
- The SEC welcomes the assessment as the first jurisdiction under the new IOSCO Objectives and Principles of Securities Regulation published in May 2017.
- The SEC expresses gratitude to the FSAP mission team and IOSCO assessors for their review of the legal system, regulatory framework, and practices of the Thai capital market.
- Since Thailand’s last FSAP in 2008, the SEC has prioritized assessment recommendations and incorporated measures into the Capital Market Development Plan and SEC Strategic Plan.
- The assessment:
  - Provided an opportunity for holistic review through self-assessment and onsite visits.
  - Finds significant progress across areas and objectively reflects development and continuous improvement.
  - Acknowledges the regulatory framework is largely compliant with the IOSCO Principles and recognizes authorities’ reform efforts.

### Use of recommendations in policy planning
- Recommendations and proposed actions will:
  - Facilitate future Capital Market Development Plan and SEC strategic planning.
  - Foster consensus among financial regulators, enforcement agencies, legislators, other authorities, and stakeholders for upcoming capital market reforms.
- The SEC will thoroughly consider observations and recommendations; responses to specific areas follow.

### Inter-agency cooperation, systemic risk, perimeter review, conflicts of interest
- Institutional arrangement with the Bank of Thailand (BoT) and Office of Insurance Commission (OIC) for full information exchange via a tri-partite MoU named “Three Regulators Steering Committee”.
- Established working groups on:
  - financial stability,
  - market conduct,
  - information sharing platform,
  - fintech and regulatory sandbox,
  - cyber security,
  - crisis management.
- The SEC has developed formalized processes for identifying, managing, and addressing systemic risks, regulatory perimeter, and conflicts of interest for capital market risk management and input to the Three Regulators Steering Committee.
- These arrangements are recognized as notable successes by assessors under Principles 6-8.

### Oversight and supervision of Stock Exchange of Thailand (SET)
- The SEC seeks to increase oversight effectiveness to ensure fair, efficient, and transparent markets.
- Recent amendment of the SEA will:
  - enhance SET governance,
  - provide clear expectations for SET to perform as an SRO and secondary market,
  - empower the SEC to approve SET trading rules.
- FSAP recommendations will support future amendments, especially empowering the SEC to take escalating disciplinary measures against SET.
- SEC will fully review issues raised, including:
  - real-time surveillance data,
  - comprehensive examination of all SET trading rules and practices,
  - fee structure,
  - conditions for block trades transactions.

### Oversight and supervision of TBMA (Thai Bond Market Association) and OTC debt securities
- Assessors highlighted need to improve transparency of pre-trade information for OTC debt securities.
- SEC actions to be taken include:
  - amending relevant regulations to require same-day report of transactions and trade execution,
  - examining practices in modeling yield curve as pricing of debt securities are widely used by mutual funds and institutional investors.
- SEC will ensure adequate supervision of all TBMA functions on OTC debt securities such as pricing methodologies, trading regulations, and disclosure requirements.

### Enhancement of enforcement effectiveness
- Civil sanction authority granted by SEA amendment has been effectively utilized by the SEC on applicable cases without delay.
- SEC will continue and elevate enforcement effectiveness and seeks to expand authority to bring civil enforcement actions for any violation of the SEA to reduce difficulties in criminal prosecution.

### Shareholders’ rights
- SEC will consider assessor recommendations on:
  - requiring more specific disclosure of directors’ interest in proxy statements,
  - allowing shareholders to exert withdrawal rights to cover other circumstances aside from takeover cases,
  - establishing internal policies related to trading by insiders.

### Regulating Market Intermediaries (MI) and managing failure events (Principle 32 concerns)
- SEC considers assessors’ comments on Principle 32; decides scope of existing laws can achieve Principle 32 objectives.
- SEC rules and powers concerning MIs (exact provisions cited):
  - MI duties on customer asset segregation and records:
    - MI shall segregate customer’s asset from its own, shall not use its customer’s asset for its own or others’ benefits except when granting the consent from customers, shall make a complete and correct record of date, numbers and types of assets, shall record the transaction and reason of changes in transaction in every time of making changes before the end of date, and shall submit the report on customer’s asset to customer and SEC monthly. (SEA: Section 98 (3), DA: Section 33).
  - Net Capital requirements and monitoring:
    - MI shall maintain Net Capital and submit the information of Net Capital to SEC daily.
    - Rules of maintaining Net Capital effectively cover risks and liabilities from conducting business for MI. SEC will follow unusual cases when significant changes to financial data occur to investigate causes and respond if such cases could damage the capital market. (SEA: Section 97, DA: Section 49).
  - When MI cannot maintain Net Capital:
    - If MI cannot maintain Net Capital according to the Notification of the office of the SEC by the virtue of SEA (Section 141) and DA (Section 50), MI is not allowed to expand business and must submit correction plan to maintain Net Capital to SEC during designated period.
    - If MI’s operation causes significant risks to customers or systems (e.g., negative Net Capital or default in clearing and settlement), MI must cease the operation, reduce risks from investment, and transfer customer’s asset to other MIs according to customer request.
  - SEC orders and rectification powers:
    - If SEC finds MI non-compliant or operations likely to cause investor damage, SEC or the Capital Market Supervisory Board (“CMSB”) shall have the power to order MI to rectify such act, refrain from doing such act or do any act as SEC or CMSB may deem appropriate within a specified period of time (including customer’s asset management). (SEA: Section 141-143, DA: Section 50).
  - Removal of responsible persons:
    - If MI fails to comply with SEC order under SEA Section 141-142, SEC has power to order MI to remove its directors, managers or persons responsible for its operation who have caused such events; MI shall appoint other person with SEC consent to replace the removed person. (SEA: Section 144).
    - If MI fails to remove such person or fails to appoint replacement with SEC consent within 30 days from the date of removal, SEC, with approval of the CMSB, has power to remove such person and appoint others to replace them. The order of the SEC is deemed as a resolution of a shareholders' meeting in accordance with the Civil and Commercial Code or the law relating to public limited companies. The person so removed shall no longer be involved in or operate, directly or indirectly any affair of that MI, and shall give assistance and provide facts to the persons so appointed. (SEA: Section 145).
  - Examination and seizure powers for MI operation review:
    - For examination of MI operations, SEC has power to appoint officers to examine operation, assets and liability, documents and other information related to MI and order seizure or attachment of the documents for beneficial examination. (SEA: Section 264, DA: Section 103).
    - If SEC reasonably believes a person would relocate or dispose assets, SEC, with approved of SEC Board, shall have the power to order seizure or attachment of such person’s assets or assets reasonably believed to belong to such person by appointing officer to undertake the process. (SEA: Section 267, DA: Section 108).
  - Bankruptcy and customer asset management:
    - If MI is announced bankrupt by the court, processes supported according to Bankruptcy Act B.E. 2483 apply.
    - SEA and DA provide SEC authority to arrange customer’s asset management to avoid loss to customers and the capital market system, including transferring assets to other MIs according to customer request or consent, and closing out customer’s unsettled positions to the clearing house if MI cannot transfer assets. (SEA: Section 111/1, DA: Section 43).
    - A person eligible to file petition of business reorganization with the court must obtain prior consent from SEC and comply with SEC rules on customer’s asset management specified in 3 (Bankruptcy Act B.E. 2483: Section 90/4).

*Source: 1thaea2019001 - 35.      The Securities and Exchange Commission of Thailand (SEC) welcomes the assessment*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1thaea2019001.pdf_