## 1thaea2019004 ## Source details **Canonical URL:** [1thaea2019004](https://www.imf.org/-/media/files/publications/cr/2019/1thaea2019004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1thaea2019004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1thaea2019004.pdf.json) --- ### Institutional and market structure — overview - Financial system assets amount to 259 percent of GDP (June 2018). - Banking sector and market size: - Banking assets: 125 percent of GDP in 2017 (103 percent in 2007). - SET market capitalization: 96.6 percent of GDP in 2017 (67 percent in 2005; 37 percent in 2008). - Insurance sector assets: over 25 percent of GDP in 2017 (10 percent of GDP in 2006); insurance constitutes 9 percent of financial sector assets. - Sector composition and concentration: - Thailand’s 30 commercial banks account for 46 percent of financial sector assets. - Eight state-owned SFIs account for 15.6 percent of financial sector assets. - Three largest commercial banks account for 44 percent of banking sector assets. - Savings and credit cooperatives and credit unions: about 6.5 percent of financial sector assets. - Commercial bank loan portfolio distribution (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 - Funding and resilience metrics: - Customer deposits > 70 percent of total funding (December 2017). - Aggregate CAR for commercial banks above 15 percent over the last decade; peak 18.5 percent in Q3 2017; regulatory requirement 8.5 percent. - No banks were below 15.5 percent (aggregate). - Commercial banks’ NPLs: 3 percent (peak 6.8 percent in 2007); NPLs had ticked up from 2.15 percent in 2014. - SFIs, cooperatives and coverage: - SFIs provide ~25 percent of consumer loans; commercial banks 41 percent. - SFIs’ reported NPLs: 4.5 percent; aggregate CAR: 12.5 percent (regulatory requirement 8.5 percent). - There are 1,409 savings and credit cooperatives and 544 credit unions providing 16 percent of consumer loans. - Risks in saving cooperatives: long-term securities investment, long-term lending to other cooperatives, maturity mismatch; monitored but not prudentially supervised by the Ministry of Agriculture. ### Preconditions for effective banking supervision - Macroeconomic and policy environment: - BOT conducts a managed float exchange rate regime and inflation targeting policy. - GDP growth in 2017 reached 4.0 percent yoy in Q4. - Headline inflation dropped below target in 2015–17; projected to rise toward the lower bound of the target in H1/2018. - International reserves: US$215 billion representing 50 percent of GDP as of Q1/2018. - Public debt to GDP: 41.2 percent at end-2017 (fiscal sustainability framework set at 60 percent). - Fiscal Responsibility Act B.E. 2561 (2018) issued in 2018. - Financial stability policy framework: - BOT leads financial stability, cooperates with SEC, OIC, and FPO across institutions, markets, payment systems, and macroeconomic policy. ### Summary assessment — supervisory framework, practices and gaps - Legal and supervisory enhancements: - FIBA (2008) establishes BOT as sole supervisor of commercial banks with enforcement powers and consolidated supervision over banks and Financial Business Groups (FBG). - FIBA amendments and BOT notifications provide comprehensive and enforceable prudential requirements aligned with international standards. - Movement to risk-based supervision: - Notifications and examination manuals increasingly emphasize qualitative factors: governance, risk management, risk appetite in composite ratings. - Onsite examinations combine quantitative (capital, liquidity) and qualitative assessments; transaction testing is used to assess operations. - Inspection reports are shifting from audit/compliance to risk analysis. - Asset classification and provisioning: - Current BOT regulations differ from some international good practice on restructuring/rescheduling and NPL identification; impact limited due to in-depth supervisory procedures. - Current provisioning coverage levels are high: provisions coverage at 140 percent (total provisions/total NPLs) and 170 percent (total provisions/required provisions). - Revised regulation aligned with TFRS 9 expected to take effect in 2020: three classes (performing, under-performing, nonperforming); performing—12-month expected credit loss; under-performing/nonperforming—expected-life ECL. - AML/CFT: - Anti-Money Laundering Act amended to strengthen bank requirements; AML/CFT supervision and STR quality improved. - Asia Pacific Group MER identified gaps: lawyers/attorneys not covered; beneficial owners not always required to be identified; no explicit PEP source-of-wealth requirement; originator/beneficiary info for wire transfers not required for non-customer-originated transactions; no STR requirement for government-entity transactions including SOEs. - Amendments are in the approval process. ### Key supervisory findings on independence, governance and cooperation - Independence and governance observations: - BOT has statutory objectives and legal powers to conduct supervision; Governor appointed for five-year term with safeguards; BOT is self-financed. - Factors potentially affecting BOT independence and reputation: - Permanent presence of the Director General of the Fiscal Policy Office (FPO) on the Financial Institutions Policy Committee (FIPC) — not in line with international good practice. - Presence of the Secretary-General of the Insurance Commission and the Secretary-General of the SEC on the FIPC dilutes operational independence. - BOT Act Section 42 appears to require Cabinet approval for Emergency Liquidity Assistance (ELA) to institutions whose liquidity problems may seriously endanger economic and monetary stability—risking political interference and delay for ELA to a D-SIB. - BOT must notify MOF after ordering action under PPA or PCA. - BOT negative net worth exacerbates vulnerability to political interference. - Supervision of SFIs: - Section 120 of FIBA and Ministerial Order Nr 433/2558 (2 April 2015) assign BOT supervision of eight SFIs but require MOF approval for BOT regulations and corrective actions. - Partial transfer of responsibilities and MOF/SEPO involvement increases reputational risk and may create misperceptions about BOT authority. - Domestic and cross-border cooperation: - BOT coordinates with SEC and OIC via the 3-Regulator Steering Committee (established 2017) and FSWG; MOUs in place for confidential information exchange. - BOT participates in supervisory colleges; as host attended four supervisory colleges in 2017 and two in 2018; organized one supervisory college in 2018 and two in 2016. ### Corrective powers, enforcement and procedural alignment (Chapter 5 of FIBA) - Legal powers and internal practice: - Chapter 5 of FIBA provides broad measures for safety and soundness; the internal Guideline for Enforcement of PPA and PCA links application of Chapter 5 measures to bank classification (“Weak”) and to Section 92’s public damage clause. - Section 92’s broad definition of actions causing public damage may require MOF notification in many cases. - BOT considers Chapter 5 measures may be applied without MOF notification and at earlier stages; in practice BOT has not resorted to PPA because banks respond promptly to recommendations. - Recommendations to increase clarity and effectiveness: - Amend the internal Guideline to clarify Chapter 5 measures may be applied independent of a specific bank classification and clarify MOF notification requirements. - Align FIBA, internal Guideline and BOT practice to expedite application of PPA and enable earlier supervisory intervention (e.g., at composite rating “3”). ### Prudential framework, capital and models - Capital regime and buffers: - BOT capital requirements aligned with Basel III: CET1 ≥ 4.5 percent; Tier 1 ≥ 6 percent; Total capital ≥ 8.5 percent (solo and consolidated). - Conservation buffer: 2.5 percent; countercyclical buffer: not currently required. - D-SIB HLA: 1 percent add-on by 2020, phase-in starting 0.5 percent in 2019 and 1 percent in 2020; five D-SIBs identified. - Reported capital ratios: Total capital ratio for D-SIBs: 17.57 percent; non-D-SIBs: 19.64 percent; foreign bank branches: 20.57 percent. - Leverage ratios monitored quarterly and well above 3 percent minimum at end-2017. - Use of internal models: - Three banks use IRB for credit risk; two foreign bank branches accredited for market risk internal model approach. - BOT has a specialized team to accredit and oversee models; BOT can revoke internal model approval (has done so once). - Pillar 2 and ICAAP: - Banks required to submit ICAAP annually (no later than Q1); BOT reviews ICAAP and may require additional capital or corrective plans. - Recommendation: develop a methodology to set individual capital ratios tailored to banks’ risk profiles, at least for the largest/most complex banks. ### Credit risk, asset classification and provisioning (Principles 17–18) - Credit risk supervision: - Banks required to maintain comprehensive credit risk processes; BOT verifies underwriting, monitoring, internal reviews and independence of credit review functions. - Supervisory tools include transaction testing, file sampling, onsite and offsite reviews, and stress testing. - Asset classification and provisioning issues: - BOT definitions of restructuring/rescheduling and NPL identification not fully aligned with international good practice: probation period to upgrade restructured exposures currently three months (international good practice: minimum one year); evergreen rescheduling permitted in regulation. - Recommendation: align definitions with Basel April 2017 guidance on NPLs and forbearance; require borrower financial difficulty focus for forbearance, extend probation to at least one year, prohibit immediate upgrade upon restructure. - Provision coverage high: 140 percent coverage (total provisions/total NPLs); revised regulation to implement TFRS 9 in 2020 expected to address shortcomings. ### Corporate governance, boards and remuneration (Principles 14–15) - Regulatory enhancements and timelines: - Solo governance regulation in effect since June 2018; governance for FBGs effective from May 2019; interim FBG governance via BOT notification FPG 8/2560. - Requirement for Risk Oversight Committee (ROC) comes into effect May 1, 2019. - Independent directors in service > 9 years grandfathered till May 2022; 9-year renewal requirement effective May 1, 2022. - Board composition and responsibilities: - At least one third of Board members must be independent directors; chairperson should be independent or non-executive. - Audit Committee: at least 3 members, all independent directors. - ROC: at least 3 members; revised Notification requires at least half be independent/non-executive/advisors. - Board duties include approving strategy, risk appetite, governance, remuneration alignment with long-term sustainability, and oversight of first/second/third line of defense. - Supervisory practice and recommendations: - BOT assesses governance deeply and may require remedial measures including changes to Board composition. - Recommendation: incorporate regular meetings with independent directors into supervisory engagement; publish best-practice guidance after thematic reviews. ### Liquidity, market, interest-rate and operational risk (Principles 22–25) - Liquidity: - LCR phase-in: 60 percent in January 2016, increasing 10 percent each year to 100 percent in January 2020; currently banks required to maintain LCR at 80 percent. - NSFR effective since July 2018 under BOT Notification No. FPG. 1/2561. - Supervisory tools: gap analysis, LCR/NSFR monitoring, contingency funding plans and stress testing. - Market and trading risk: - Market risk considered low; trading income < 10 percent of Thai bank earnings. - Supervisory stress testing for trading book and AFS positions under baseline, moderate and severe scenarios; no significant impacts disclosed. - Interest rate risk in banking book: - ICAAP/quarterly reporting requirements; EVE impact threshold: 20 percent of total capital under SVG. 5/2552. - Operational risk and IT: - Comprehensive ORM framework; IT best practices and cyber resilience assessments in place; outsourcing guidelines and BCP/DR testing (BAHTNET critical SIPS) enforced. ### Reporting, audit, disclosure and external audit (Principles 26–28) - Financial reporting and audit: - TASs/TFRSs align with IAS/IFRS except for financial instruments differences addressed by reforms; external auditors report to BOT and must notify BOT of fraud suspicions. - BOT can appoint auditors/specialists (Section 71) and can reject/rescind auditor approval (Section 69). - Auditor rotation: auditors limited to 5 consecutive financial years; individual auditor rotation also required. - Disclosure and Pillar 3: - BOT requires monthly summary statements, quarterly and annual disclosures; Pillar 3 notifications prescribe templates and comparability metrics. - BOT publishes aggregate statistics and an annual Financial Stability Report. - Enforcement: - Section 146(2) and (3) of FIBA penalize false or incomplete accounting entries; deadlines prescribe submission of financials (first half within 3 months, full year within 4 months). ### Related-party, large exposures, concentration and cross-border supervision (Principles 19–21, 12–13) - Related-party transactions: - Section 48(1) prohibits credits to directors, senior management and related persons except employee benefits; Section 49 and BOT notifications set limits (5 percent of capital or 25 percent of liabilities, whichever lower). - Supervisory review includes DMS submissions, transaction testing and Board approval requirements; BOT ensures arm’s-length treatment and can order remediation. - Large exposures and concentration: - Single counterparty/project limit: 25 percent of capital funds (solo and consolidated). - Investment limits: total investments in shares ≤ 20 percent of capital; any single company ≤ 5 percent of capital (exceptions and group rules apply). - Supervisory stress testing required; top 100 group debtor monitoring performed semesterly. - Cross-border supervision and home-host cooperation: - BOT organizes/participates in supervisory colleges, maintains MOUs with multiple foreign supervisors, requires prior approval for overseas branches/subsidiaries with conditions on reporting and head office support. ### AML/CFT supervision and remaining gaps (Principle 29) - Institutional roles and coordination: - AMLO is AML/CFT supervisor; BOT plays important inspection and supervisory role under MOUs (e.g., 10 April 2015 MOU). - AML/CFT responsibilities include STR/CTR reporting, CDD, enhanced due diligence for PEPs and correspondent banking controls. - Gaps identified by MER: - Beneficial owners not always required to be identified. - No explicit requirement for PEP source-of-wealth identification. - Originator and beneficiary information for wire transfers not required for transactions originated by non-customers. - No STR filing requirement for transactions between government entities including SOEs. - Actions: - Amendments to AMLA and Ministerial Regulations are under approval to address these gaps. - Supervisory resources and training expanded; AMLO and BOT coordination strengthened. ### Selected assessor recommendations and follow-up actions - Strengthen BOT independence and governance: - Remove permanent membership of Director General of FPO from FIPC (or include only in crisis times); remove Secretary-Generals of OIC and SEC from FIPC to avoid dilution of accountability. - Address Section 42 implications to reduce political involvement in ELA decision-making. - Formalize rotation policy: rotate relationship managers after 3–5 years; set maximum assignment period per supervisor. - Clarify enforcement and early intervention: - Amend internal Guideline to allow earlier application of Chapter 5 measures/PPA prior to “Weak” classification; align Guideline with FIBA and clarify MOF notification thresholds. - Raise supervisory expectation for formal action at composite rating “3” and define early financial triggers and qualitative benchmarks. - Prudential and supervisory enhancements: - Develop methodology for individual bank capital ratios under Pillar 2. - Revise asset classification/provisioning to align with Basel April 2017 guidance and implement TFRS 9 consistent regulation in 2020 (probation period of ≥ 1 year for restructured exposures, clarify borrower vs transaction level, list indicators for “unlikeliness to pay”). - Publish best-practice guides after thematic reviews to articulate supervisory expectations. - AML/CFT: - Implement legislative amendments addressing MER-identified shortcomings once approved by legislature. *Source: IMF FSAP chapter — assessment performed October 25 through November 16, 2018 (PDF content unit 1thaea2019004).* ### INTRODUCTION _________________________________________________________________________________ 6 ### INTRODUCTION ### Institutional and market structure—overview - Financial system assets amount to 259 percent of GDP (June 2018). - Assets of Thailand’s 30 commercial banks (including 15 foreign branches or subsidiaries) account for 46 percent of financial sector assets. - Eight 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. - In 2017, banking assets amounted to 125 percent of GDP, compared to 103 percent in 2007. - Market capitalization of the Stock Exchange of Thailand (SET) in 2017 was 96.6 percent of GDP, up from 67 percent of GDP in 2005 (and from 37 percent of GDP in 2008). - Insurance sector assets grew from 10 percent of GDP in 2006 to over 25 percent of GDP in 2017, constituting 9 percent of financial sector assets. - Savings and credit cooperatives and credit unions represent about 6.5 percent of 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 was above 15 percent over the last decade, reaching a peak of 18.5 percent in Q3 2017; regulatory requirement is 8.5 percent. - No banks were below 15.5 percent (aggregate). - Commercial banks’ NPLs were 3 percent (down from a peak of 6.8 percent in 2007); NPLs had ticked up from 2.15 percent in 2014. - SFIs, savings and credit cooperatives, and credit unions: - SFIs provide some 25 percent of consumer loans (commercial banks provide 41 percent). - Eight SFIs were brought under BOT supervision in 2015 but do not face the same disclosure requirements or supervision regime as commercial banks. - SFIs’ reported NPLs: 4.5 percent. - SFIs’ aggregate CAR: 12.5 percent (regulatory requirement 8.5 percent). - There are 1,409 savings and credit cooperatives and 544 credit unions, which provide 16 percent of consumer loans. - Risks in saving cooperatives: investment in long-term securities and long-term lending to other cooperatives; maturity mismatch between long-term assets and short-term funding; currently monitored but not prudentially supervised by the Ministry of Agriculture. ### Preconditions for effective banking supervision A. Soundness and Sustainability of Macroeconomic Policy - BOT conducts a managed float exchange rate regime and inflation targeting policy. - GDP growth in 2017 reached 4.0 percent yoy in Q4. - Headline inflation dropped below the target range in 2015–17; projected to rise toward the lower bound of the target in H1/2018. - Financial conditions supportive of growth, but pockets of risk exist from search-for-yield behavior and low debt serviceability of households and SMEs. - Thailand’s external position: current account surplus and low foreign debt. - International reserves stood at US$215 billion representing 50 percent of GDP as of Q1/2018. - Fiscal stance remains expansionary to support recovery; public debt to GDP registered at 41.2 percent at the end of 2017 (fiscal sustainability framework set at 60 percent). - The Fiscal Responsibility Act B.E. 2561 (2018) was issued in 2018 to enhance transparency in the government budget process. B. Financial Stability Policy Framework - The BOT assumes the leading role in safeguarding financial stability and cooperates with SEC, OIC, and FPO to ensure system stability across institutions, markets, payment systems, and macroeconomic policy sustainability. ### Summary assessment (selected main findings) - Significant enhancements to the legal framework and supervisory process since the last BCP review have resulted in high compliance. - The Financial Institutions Business Act (FIBA), adopted in 2008, establishes the Bank of Thailand (BOT) as the sole supervisor of commercial banks with powers of enforcement and narrows the role of the Ministry of Finance (MOF) in supervision. - MOF grants and revokes licenses based on BOT recommendations; when BOT implements prompt preventive actions (PPA), MOF must be notified ex-post. - Factors that may negatively impact BOT independence and reputation: - Permanent presence of the Director General of the Fiscal Policy Office (FPO) on the Financial Institutions Policy Committee (FIPC), not in line with international good practice. - Presence of the Secretary-General of the Insurance Commission and the Secretary-General of the Securities and Exchange on the FIPC, compromising operational independence and diluting accountability. - BOT Act Section 42 appears to require Cabinet approval for granting Emergency Liquidity Assistance (ELA) to financial institutions that may seriously endanger the stability of the economic and monetary system. - BOT needs to notify MOF after ordering action under the PPA or Prompt Corrective Action (PCA) framework. - Negative net worth of the BOT exacerbates risks to BOT’s independence and vulnerability to political interference. - Supervision of Specialized Financial Institutions (SFIs): - Involvement of FPO and State Enterprise Office (SEPO) in SFI supervision and partial transfer of responsibilities to BOT (ministerial approval still required for corrective action against SFIs and to set legally binding SFI regulations) may lead to reputational risk for BOT and misperceptions about the scope of BOT authority. - Consolidated supervision and enforcement authority enhanced by FIBA implementation: - FIBA provides for supervision of banks and Financial Business Groups (FBG) on a consolidated basis; the repealed Commercial Banking Act did not address consolidated supervision. - PPA framework provides BOT with tools based on severity; PCA framework enables BOT to rectify a capital deficiency. - Movement toward risk-based supervision: - Notifications and examination manuals increasingly focus on qualitative factors (governance, risk management, risk appetite statements) to determine composite ratings. - BOT examinations address quantitative (capital, liquidity) and qualitative aspects (board policies, quality of risk management). - Transaction testing is performed to assess bank operations and processes. - Inspection reports reflect a move away from audit and compliance approach to risk analysis. - Issuance of best practices guidance and defining supervisory expectations would support migration from auditing to risk analysis and facilitate corrective action based on qualitative factors. - Increasing reliance on banks’ internal controls and audit requires ensuring those functions adequately monitor and control transaction risk. - Enforcement efficiency and FIBA alignment issues: - FIBA Chapter 5 outlines measures available to BOT and the situations where they apply; application depends on whether the situation may “cause damage to the public interest,” which broadly defined in Section 92 may require MOF notification in most cases. - BOT internal Guideline for Enforcement of PPA and PCA groups Chapter 5 measures and labels them as PPA measures; Guideline links application of measures to bank classification, creating a discrepancy that makes application more stringent under the internal Guideline. - Chapter 5 measures are more effective if applied at an early stage; BOT has not had to invoke PPA as banks implement BOT recommendations communicated after supervisory activities. - Regulatory corpus and prudential framework: - BOT’s regulations, guidelines, and supervisory manuals are comprehensive, enforceable, and build on international standards. - BOT sets conservative capital adequacy requirements; foreign bank branches are required to hold regulatory capital like subsidiaries. - Comprehensive requirements for corporate governance and risk management are commensurate with bank risk profiles and systemic importance; supervisors evaluate effectiveness and instruct corrections. - Asset classification and provisioning: - Current regulation falls short of international good practice in some areas (definitions of restructuring and rescheduling; NPL identification practices), but impact is limited. - BOT supervisors perform in-depth procedures to assess these regulatory gaps. - Current provisioning levels are high compared to international peers. - A revised regulation that complies with international good practice will come into effect once IFRS 9 becomes effective in 2020; this will align Thai accounting standards for financial instruments with IFRS. - AML/CFT developments: - Anti-Money Laundering Act amended to strengthen bank requirements. - Significant improvement in AML/CFT supervision regime and bank implementation; quality of suspicious transaction report (STR) filings has shown strong improvement. - Asia Pacific Group Mutual Evaluation Review (MER) identified gaps: - Lawyers and attorneys not covered. - Beneficial owners not always required to be identified. - No explicit requirement for politically exposed person (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. - No requirement for filing STRs on transactions between government entities, including state owned enterprises (SOEs). - Amendments to legislation addressing these shortcomings are undergoing the approval process. ### Assessment scope and methodology (selected) - This assessment of BCP implementation by BOT is part of the FSAP undertaken by the IMF and the World Bank. - The assessment was performed October 25 through November 16, 2018 and is based on the regulatory and supervisory framework in place at the time of the visit. - Compliance was measured against Basel Committee on Banking Supervision (BCBS) standards issued in 2012. - The 2012 BCP revision places increased emphasis on corporate governance, supervisors’ reviews to determine compliance with regulatory requirements, and thoroughly understanding the risk profile of banks and the banking system. - The assessors received comprehensive cooperation from BOT, including a detailed self-assessment and access to supervisory manuals, onsite inspection reports, monitoring reports, and risk assessments. *Source: INTRODUCTION (assessment performed October 25 through November 16, 2018) — IMF FSAP chapter.* ### 11. There are several departments and committees within the BOT tasked with monitoring ### 11. There are several departments and committees within the BOT tasked with monitoring ### Financial stability governance and the Financial Stability Unit (FSU) - In 2016, the BOT established the Financial Stability Unit (FSU) to monitor and identify areas of financial risk build-up and cross-cutting issues. - FSU functions: - Draw on sectoral surveillance conducted by different departments within the BOT. - Cooperate with other supervisory authorities by exchanging information and jointly conducting risk monitoring and assessments. - Develop tools and capacity for financial stability assessments. - Undertake the design of macroeconomic scenarios for stress testing. - Develop a macroprudential toolkit and framework in preparation for policy functions. - Act as secretariat for financial stability meetings. - Edit the Financial Stability Report. - Coordination and meeting structure: - The FSU and line departments meet regularly, both formally and informally. - The sub-committee of Financial Stability holds formal, quarterly meetings chaired by the BOT Governor, during which risk assessments are discussed. - The internal Financial Stability Working Group (internal FSWG) meets in preparation for sub-committee meetings. - Assistant governors from financial stability-related line departments participate in internal FSWG meetings. - Meetings are chaired by assistant governors of the Monetary Policy Group and Financial Institutions Policy Group with the Financial Stability Unit director as secretary. - The BOT, SEC, and OIC coordinate financial system surveillance through the FSWG. - These authorities participate in the 3-Regulator Steering Committee, which reports to both the Committee and the Joint Meeting of the Monetary Policy Committee (MPC) and the 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 escalated to the Joint Meeting of the MPC and the FIPC as well as the 3-Regulator Steering Committee. ### Legal and institutional public infrastructure - Constitutional and legislative context: - Thailand has a civil legal system based on case law; the Constitution is the supreme law of the State. - Enactment of law can be by the Legislative Branch (Parliament) or the Executive Branch (Cabinet). - Subordinated law can be issued as a Royal Decree proposed by the Cabinet or as ministerial regulation by an authorized minister. - Court structure: - Courts classified into four categories: Constitutional, Administrative, Military, and the Courts of Justice. - Courts of Justice levels: - Courts of First Instance (general courts, juvenile and family courts, and specialized courts), - Courts of Appeal (Court of Appeal and nine Regional Courts), - Supreme Court (final court of appeal in all civil and criminal cases). - Legal professions and qualifications: - Practice of law governed by the Lawyer Act, the Judicial Service Act, and the Public Prosecution Organ and Public Prosecutor Act. - Lawyers: license via examination of the Lawyer Council of Thailand and become its member. - Judges and public prosecutors: must pass the examination of the Institute of Legal Education of Thai Bar Association and be recruited by the Judicial Commission or the Public Prosecutor Commission. - Accounting and auditing framework: - Accounting Profession Act established the Federation of Accounting Professions (FAP) (October 2004) as a self-regulated entity. - FAP powers: formulate accounting and auditing standards; develop a code of ethics; ensure compliance; issue/suspend/revoke auditing licenses; issue regulation for Continuing Professional Development (CPD). - Thai Accounting Standards (TAS) and Thai Financial Reporting Standards (TFRS) align with IAS and IFRS, except for standards covering financial instruments (IAS 32, IAS 39, and IFRS 7). - Thai Standards of Auditing (TSA) conform to International Standards on Auditing (ISA). - TASs and TFRSs apply to all public companies, banks, insurance companies, securities companies, and mutual funds. - Payment systems and oversight: - BOT empowered under the BOT Act to operate payment systems and conduct activities to maintain payment systems stability. - BAHTNET: BOT Automated High-Value Transfer Network; the only large value payment system (LVPS) operated on real time gross settlement basis; considered a Systemically Important Payment System (SIPS). - BAHTNET provides inter-institution funds transfer service for financial institutions and final settlement to net clearing positions from retail payment systems such as cheque clearing (ICAS) and interbank retail funds transfer system (ITMX). - Payment Systems Committee (PSC): - Established under the BOT Act to formulate policies about payment systems under BOT supervision and inter-bank clearing systems. - Acts as both the oversight board of payment systems and the FMI's board for BAHTNET. - Performs oversight functions: establishing supervisory policies and the oversight framework; as an FMI Board, oversees operations and key performance of BAHTNET and approves the risk management framework for BAHTNET’s operations. - Credit information: - National Credit Bureau (NCB) is the single private credit bureau in Thailand banks can join. - NCB resulted from the 2005 merger of the Thai Credit Bureau and Central Credit Information Services. - 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. ### Deposit protection and financial safety net - Roles and responsibilities: - BOT, the SEC, and the OIC are responsible for supervising, issuing policies, and resolving entities under supervision in their respective sectors. - BOT performs the duty as “a lender of last resort” of financial institutions in accordance with the BOT Act. - Deposit Protection Agency (DPA) is responsible for deposit protection. - Deposit Protection Act and DPA: - Deposit Protection Act B.E. 2551 (DPA Act) passed in 2008, establishing the DPA supervised by the MOF. - DPA acts as a paybox-plus and has three primary objectives stated in the law: - (i) to provide protection for deposits in financial institutions; - (ii) to enhance confidence and stability in the financial institution system; - (iii) to manage financial institutions subject to control under the Financial Institutions Businesses Act 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 end-2017, the size of the Deposit Protection Fund was THB 120.03 billion. This represents around 3 percent of insured deposits. - 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: Non-Resident Baht Accounts (NRBAs), derivative-embedded deposits, and interbank deposits. ### Corporate governance and supervisory standards - SEC and corporate governance: - SEC, in collaboration with the SET and the Thai Institute of Directors (IOD), has taken measures to enhance corporate governance standards. - Measures include requirement that companies obtain approval to issue and offer for sale securities and adherence to the Investment Governance Code for institutional investors. - BOT actions for financial institutions: - BOT focuses on enhancing corporate governance and management systems for financial institutions and financial business groups. - In May 2018, 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) directors’ responsibilities in financial institution management; - (iii) the establishment of the board of directors and subcommittees including their composition, qualifications, and responsibilities; - (iv) disclosure of information. - BOT revised the Handbook for Directors of Financial Institutions to align with the changing environment and focus on roles and responsibilities of the board for each aspect of governance. ### Main findings — Responsibilities, methods of supervision, independence, and cooperation - Responsibilities, Objectives, Powers, Independence, and Cooperation (CPs 1–3, and 13): - 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 BOT recommends and 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 due to potential political interference. - There are eight SFIs in Thailand, each with a different mandate assigned by founding law. Four SFIs are deposit-taking institutions and comply with the definition of a commercial bank in accordance with FIBA. - SFIs are regulated and supervised by the BOT with extensive involvement of the State Enterprise Policy Office (SEPO) as owner and the Fiscal Policy Office (FPO) as policy maker. - The minister of finance has delegated large parts of supervision to BOT but not corresponding powers to take corrective action against problems in SFIs or to set legally binding SFI regulations without ministerial approval. - FIBA provides a framework for BOT to set minimum enforceable prudential standards for banks and banking groups; BOT issues banking notifications that are subordinate legislation of FIBA and considered as law. - BOT guidance is not considered law and is usually released to apply industry best practice. - 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. - BOT is well resourced with 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 in practice and should be formalized: relationship managers and their teams should be rotated after 3–5 years supervising the same institution or banking group; maximum period that any supervisor can be assigned to the same institution should be established. - Factors potentially interfering with BOT independence: - Permanent presence of the Director General of the Fiscal Policy Office (FPO) on the FIPC is not in accordance with international good practice. - Presence and participation of Secretary-General of the Insurance Commission and Secretary-General of the Securities and Exchange on the FIPC compromises operational independence and dilutes accountability. - Section 42 of BOT Act requires BOT, after approval of the FIPC and the Cabinet, to approve granting of a loan or financial assistance when a financial institution faces liquidity problems that may seriously endanger the stability of the economic and monetary system — creating potential political interference and delays for ELA to a D-SIB. - BOT must notify MOF if it applies the PPA framework and the Prompt Corrective Action. - BOT’s weak financial position and continued operation despite negative net worth exacerbates risk to BOT's independence and vulnerability to political interference. - SFI supervision recently transferred to BOT; SFIs are supervised by a separate department reporting to the Assistant Governor of the Supervision Group, the same as commercial bank supervision departments — raising risk of contamination between SFI and commercial bank decision-making. - Formal and informal arrangements for domestic and international cooperation established and functioning well; arrangements formalized in Memorandums of Understanding (MOUs) and allow exchange of confidential information based on FIBA provisions. - Methods of Ongoing Supervision (CPs 8–10, and 12): - Supervisory process is well established and risk-based. - Banks supervised by a team under a relationship manager (RM) responsible for onsite examinations and offsite analysis. - Process flexibility allows BOT to: - decrease reliance on an annual onsite examination or expand offsite analysis and communications with banks, resulting in ongoing monitoring; - expand use of early warning indicators (EWI); - incorporate possible impact of macroeconomic trends into supervisory scope. - Effective follow-up ensures implementation of BOT recommendations: - Recommendations in examination reports are discussed with senior bank management and a copy of the report is sent to the bank’s board. - Dates for responses are established and examiners follow-up as part of offsite ongoing monitoring. - Bank risk profiling: - Banks are analyzed and assigned forward-looking ratings covering significant activities impacting financial condition and performance. - At completion of analysis, a composite rating is assigned to aid supervisors in developing supervision plans. - BOT can leverage risk analysis by increased targeting of activities to higher-risk areas and more narrowly scoping annual onsite examinations, as appropriate. *https://www.imf.org/-/media/files/publications/cr/2019/1thaea2019004.pdf* ### 36. The BOT’s consolidated supervision powers have been significantly enhanced. FIBA was ### 1thaea2019004 - 36. The BOT’s consolidated supervision powers have been significantly enhanced. FIBA was ### Consolidated supervision powers - FIBA was amended to include consolidated supervision over banking groups and FBGs. - FIBA grants the BOT authority to: - approve the establishment of FBGs; - require changes in FBG structure if it impedes proper supervision; - supervise the bank, its 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. ### BOT supervisory framework and practices - Notifications and examination manuals increasingly focus on qualitative factors: governance, risk management, and risk appetite statements in determining the bank’s composite rating. - Onsite examinations focus on both quantitative aspects (e.g., capital, liquidity) and qualitative aspects (e.g., adequacy of board policies, quality of risk management). - Transaction testing is performed to assess bank operations and processes to ensure compliance with BOT notifications. - Inspection reports are shifting away from audit/compliance approaches toward risk analysis. - Issuance of best practices guidance and clearer supervisory expectations would: - encourage migration from auditing to risk analysis; - facilitate corrective action based on qualitative factors. - Ensuring banks’ internal controls and audit adequately monitor and control transaction risk is an additional supervisory pillar. ### Corrective and sanctioning powers of supervisors (CP 11) - BOT has a broad range of possible measures to address safety and soundness issues, but internal procedures could be enhanced. - Current practice and legal framework notes: - Under the Guideline, PPA measures are applied to banks classified as “weak” and which “would cause damage to public interest.” - Chapter 5 of FIBA defines and provides BOT authority to apply measures addressed in the BOT Guideline but does not link their application to bank classification. - Chapter 5 broadly defines actions causing public damage and requiring notification to the MOF. - BOT considers Chapter 5 measures may be applied without MOF notification. - Recommendation: - Amend the Guideline to clarify that Chapter 5 measures may be applied independent of a specific bank classification and to clarify the need to notify MOF to increase effectiveness and clarity. - Aligning FIBA, the Guideline, and BOT practice would expedite application of PPA. - The Guideline has integrated financial triggers according to the early warning system (EWS) aligning it with PPA/PCA. - BOT is enhancing qualitative elements such as the quality of risk management into triggers. - Banks promptly respond to BOT inspection report recommendations; BOT has not had to apply stronger measures to date. ### Corporate governance (CP 14) - BOT regulations, guidelines, and the corporate governance supervisory manual are comprehensive, enforceable, and aligned with international good practice. - Recent and forthcoming regulatory timeline: - New solo governance regulation in effect since June 2018. - Governance enhancement for FBGs to be in effect from May 2019 onwards. - Interim governance of FBGs follows BOT notification no. FPG 8/2560. - Enhanced governance expectations reinforce: - responsibility of the parent company board on oversight of subsidiaries; and - composition of the parent company’s board and subcommittees. - Transitional/grandfathering measures: - Independent directors in service for more than nine years will be grandfathered till May 2022. - 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 and supervision - BOT determines 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. - Detailed requirements exist for credit risk, market risk, operational risk, liquidity risk, and IT risk; conservative assumptions are linked to capital adequacy requirements. - BOT requires development and review of banks’ contingency plans. - Risk management supervision is commensurate with risk profile and systemic importance. - BOT supervisors evaluate effectiveness and instruct corrections where appropriate. - Recommendation: publish best-practice guides after thematic reviews or when divergent practices observed to articulate supervisory expectations and bolster international standing. - Capital adequacy and models - BOT sets conservative capital adequacy requirements; components absorb losses and requirements are in line with Basel III. - Average CET1 ratio: around 15 percent for D-SIBs 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. - BOT has a well-staffed specialized team that accredits and oversees modelling by banks. - BOT will require a 1 percent add-on for D-SIBs by 2020. - BOT has not yet tailored capital ratios to the risk profile of individual banks; recommendation to develop methodology for individual capital ratios, at least for largest and most complex banks. - Credit risk and asset classification gaps - BOT’s definition of restructuring and rescheduling is not in line with international good practice; should include financial difficulty of the borrower and should not be conditioned on the bank making a loss. - Probation period for restructured exposures to be upgraded is currently three months; international good practice requires a minimum of one year. - Regulation allows upgrade when restructuring or rescheduling is granted and has no limit on the number of times banks can reschedule or restructure (evergreening). - Regulation should clarify level of application of asset classification (borrower or transaction level). - Banks should be required to include indicators to determine “unlikeliness to pay” in their policies. - BOT supervisors perform in-depth procedures to address these regulatory gaps. - Current provisioning coverage levels: 140 percent. - TFRS 9 and revised regulation - BOT issued a revised regulation to be implemented after TFRS 9 becomes effective in 2020. - Revised classification: 3 classes — performing, under-performing, and nonperforming. - Performing: provisions set against expected credit losses over a 12-month period. - Under-performing and nonperforming: provisions set against expected credit losses over the expected life. - Revised regulation was not in force at the time of the assessment but is expected to address most identified shortcomings. - Related-party lending - Detailed related-party lending legal framework established. - Definition of related party is broad and provides BOT significant latitude for supervisory judgment. - Directors, senior managers, and persons with power of management are not permitted to borrow from the bank. - BOT closely monitors related party transactions and reviews intra-group lending. - Other risks and accounting - Country, liquidity, market, interest rate, and operational risks are monitored under a fully-developed and comprehensive regulatory framework following Basel guidance; data feed risk dashboards. - Cross-border lending and establishments are increasing, highlighting need for close monitoring of risk appetite statements and growth strategies. - Thai accounting standards generally in line with IFRS at assessment date. - BOT's asset classification and provisioning standards in banks’ financial statements are more conservative than IAS 39. - Quantitative impact studies reveal current BOT provisioning outcomes are closer to IFRS 9. - IFRS 9 to be fully implemented in 2020. ### AML/CFT supervision - Asia Pacific Group mutual evaluation review disclosed areas for improvement in AML/CFT supervision. - AMLO is the primary regulator; BOT plays an important role. - MER identified gaps: - Identification of beneficial owner is not always required. - No explicit requirement for PEP source of wealth to be identified. - Originator and beneficiary information for wire transfers is not required for transactions originated by non-customers of the bank. - No requirement to file STRs for transactions between government entities, including SOEs. - Amendments to legislation are undergoing approval to address these shortcomings. ### Detailed assessment methodology and grading - Compliance grading scale: compliant, largely compliant, materially noncompliant, noncompliant; “not applicable” can be used in certain circumstances. - Grading definitions summarize expectations for meeting essential criteria and practical implementation. - Thailand opted for assessment against the essential and additional criteria. - Template guidance for Principle-by-Principle self-assessment includes: - “Description” of system citing main laws and regulations (e.g., BOT Act, FIBA); - “Assessment” line if grade included; - “Comments” to explain gradings and implementation details. - BOT is sole authority responsible for banking supervision; responsibilities and objectives stipulated in: - The BOT Act, B.E. 2485 (1942) as amended (BOT Act); - The Financial Institution Business Act, B.E. 2551 (2008) as amended (FIBA). - FIPC established under BOT Act to formulate and execute supervision policies and monitor BOT operations regarding banking supervision (Section 28/10); composition described (Section 28/9). - FIBA empowers the BOT with specific authorities (selected sections cited): - Approving establishment/change/closure of branches (Section 13), representative offices (Section 14), permitting issuance of preference shares (Section 15), approving non-Thai shareholders/directors exceeding limits (Section 16), permitting share possession above threshold (Section 18), approving appointment/reappointment of directors or managers (Section 25), approving sale/transfer/acquisition of important parts of business (Section 43), supervising and examining bank, parent, subsidiary, and affiliate for group stability (Section 57), permitting establishment or acquisition of a subsidiary (Section 58), appointing supervisors to examine banks and related entities (Section 85), ordering rectification, capital adjustments, suspension, removal of directors or managers, control or closure if condition may cause damage to public interest (Section 90), and ordering control/closure for capital fund shortfall (Section 96 and 97). - Certain authorities exercised by the Ministry of Finance upon recommendation of the BOT include licensing of a bank (Section 9), licensing a branch of a foreign bank (Section 10), approving non-Thai shareholders/directors exceeding prescribed limit in case of system stability concerns (Section 16), and revoking a banking license under specified circumstances (Sections 83, 90, 93, 95, 97, 110, and 111). *Source: IMF assessment excerpt as provided in the supplied content.* ### Section 120 of FIBA which is now declared in Royal Thai Government Gazette and currently ### Section 120 of FIBA which is now declared in Royal Thai Government Gazette and currently ### Legal basis and assignment of supervisory responsibility - Section 120 of FIBA, declared in the Royal Thai Government Gazette and legally effective, provides the statutory ground for the Ministry of Finance (MOF) to assign the Bank of Thailand (BOT) as regulator and supervisor of specified financial institutions (SFIs). - In December 2014, the Cabinet approved the BOT to be the regulator of SFIs with the following duties: - (i) issuing regulations for SFI supervision with approval of the MOF; - (ii) reviewing the fit and proper criteria for directors and senior management; - (iii) supervising through onsite and offsite monitoring; and - (iv) providing effective enforcement. - Ministerial Order Nr 433/2558, dated April 2, 2015, assigns the BOT with supervision of eight SFIs according to Section 120 of FIBA, allowing the BOT to carry out the four mandates prescribed by the Cabinet while requiring MOF approval for BOT regulations and corrective actions. - All related laws, acts, regulations, and notifications are required to be published in the Government Gazette. ### Primary objective and institutional structure (EC2) - Primary objective: - Promote the safety and soundness of banks and the banking system; other BOT responsibilities are subordinate to this primary objective. - Legal foundation: - BOT Act Section 7 establishes the primary role of banking supervision to maintain safety and soundness of banks and the financial institution system. - Section 39 of FIBA mandates consumer protection as a BOT duty, along with promoting financial inclusion and financial literacy. - Institutional structure: - Prominence is given to departments responsible for banking supervision, including the Regulatory Policy Department, Financial Institution Applications Department, and four Banking Supervision Departments. - In 2016, BOT established the Financial Consumer Protection and Market Conduct Department separate from the Banking Supervision Departments. ### Prudential framework and supervisor powers to set standards (EC3) - Legal empowerment: - FIBA empowers the BOT to issue prudential policies and requirements for banks and banking groups, and to increase prudential requirements for individual banks (Section 30). - Instruments: - Prudential standards are issued as notifications, guidelines, or circulars. - Notifications are binding and applied on a solo or consolidated basis. - Guidance notes are not binding; non-compliance may lead the BOT to state recommendations in examination reports or consider composite ratings. - Prudential areas specified by FIBA include capital adequacy ratios, liquidity requirements, single lending limits or large exposures, investment limits, asset classification and provisions, related lending, and consolidated supervision. - Specific statutory provisions: i. Maintenance of Capital Funds and Assets - Maintaining capital fund with amount, types, and categories in accordance with the rule prescribed by the BOT (Section 29). - Maintaining capital fund in proportion to banks’ assets, liabilities, and any other risks in accordance with the rule prescribed by the BOT (Section 30). - Disclosing information related to maintenance of capital funds and information related to the banks’ risks or their banking groups’ risk in accordance with the rules prescribed by the BOT (Section 31). ii. Investment by Banks - Investing in securities for their ownership in accordance with the rule prescribed by the BOT (Section 33). - Possessing or owning shares of any companies not exceeding the specified ratios in accordance with the rule specified by the BOT (Section 34). - Not possessing or owning shares of other banks (Section 35). iii. Restrictions on Granting of Credits - Granting credits to the banks’ major shareholders or to business with related interest not exceeding specified thresholds (Section 49). - Granting credits to one or several persons jointly in any project or for the same purpose not exceeding specified thresholds (Section 50). - Granting credits to each type of business not exceeding the thresholds prescribed by the BOT (Section 51). - Granting credits to the banks’ parent company, subsidiaries, or affiliates not exceeding the threshold prescribed by the BOT (Section 59). iv. Classification of Assets and Provisioning - Classifying assets and contingent liabilities and writing off or making provisions for such assets and contingent liabilities in accordance with the rule prescribed by the BOT (Section 60 and Section 61). - Ceasing recognition of and reversing accrued interest received as income from classified assets in accordance with the rules prescribed by the BOT (Section 62). v. Management of Assets and Maintenance of Liquid Assets - Managing assets, liabilities, and contingent liabilities to be in line with deposits, borrowings, or acceptance of money from the public in accordance with the rules prescribed by the BOT (Section 63). - Maintaining liquid assets in proportion to deposits or loans at the ratio not less than that prescribed by the BOT (Section 64). vi. Banking group supervision - No banking group shall be established unless permitted by the BOT in accordance with the rules prescribed by the BOT (Section 54). - The companies within a banking group may undertake only financial business or supporting businesses as prescribed by the BOT, and may not undertake any other trade or business (Section 56). - The BOT shall have the power to supervise and examine the banks, their parent company, subsidiaries, and affiliates as if they were the same juristic person, in accordance with the rules prescribed by the BOT (Section 57 paragraph one). - The BOT shall have the power to prescribe the ratio of capital funds or capital of the banking group of the banks to assets, liabilities, contingent liabilities, or variables and any other risks, or to prescribe other ratios of the banking group of such banks, and to require the banking group to disclose information among each other in accordance with the rules prescribed by the BOT (Section 57 paragraph two). - Risk-based strengthening: - If an individual bank has high risk exposure, the BOT may order the bank to undertake any relevant and appropriate capital maintenance measures (Section 30). ### Supervisory access, consolidated and cross-border review (EC5) - Full access to boards, management, staff and records (Section 71 and Section 85) - Ordering a bank and its banking group to submit any report or any information or present any document. - Ordering a bank to have its directors, managers, officers, employees, persons with power of management, or auditors to testify or present information, account, document, and other evidence related to the business of the bank. - Appointing an auditor or specialist to conduct an examination where submissions are incomplete or ambiguous, or as deemed necessary or appropriate. - Appointment of BOT officers or external experts as bank supervisors to examine business, assets and liabilities of a bank, its parent company, subsidiaries or affiliates, and other companies within the banking group. - The BOT has not yet appointed an auditor or specialist to conduct a special examination. - Consolidated supervision and review of banking group activities - BOT supervises locally-incorporated banks on both solo and consolidated basis, covering domestic and cross-border operations (Division 5 of FIBA, Section 53 – Section 59). - Prior approval from the BOT is required for establishment of a financial business group (Section 54). - BOT can supervise and examine a bank, its parent company, subsidiaries and affiliates as if they were the same legal person (Section 57). - Supervision of foreign activities and overseas establishments - BOT has power to supervise all activities of banks, including branches and investment activities, domestic and foreign. - Section 13 of FIBA requires BOT approval before opening a branch. - Section 58 of FIBA requires BOT approval before establishing a subsidiary; BOT may impose conditions. - BOT Notification No. FPG. 8/2554: Regulations on the Establishment and Oversight of Overseas Branches of Thai Commercial Banks governs oversight of overseas establishments. - Section 85 empowers the BOT to appoint supervisors to examine all banking activities including meeting bank employees at all levels, entering premises, and collecting information and documents. ### Corrective powers, sanctions, license revocation, and crisis cooperation (EC6) - Timely corrective action (legal powers and thresholds) - Supervisors will take immediate action to rectify imprudent banking practices (Section 85). - For violations or failure to act in accordance with laws, regulations, or license conditions, BOT may issue a written warning, prohibit an act in violation, or order removal of directors, managers, or persons with power of management (Section 89). - If a bank’s condition or operation may damage the public interest, BOT may order rectification, write-down and increase of capital within the time specified or immediately; such an order is deemed to be a resolution of the shareholders meeting (Section 90). - If a bank suspends repayment when due, BOT shall appoint a bank supervisor and may place the bank under control, order closure or issue any order as deemed appropriate (Section 93). - Capital shortfall responses: - A bank must submit a plan for rectifying its condition and operation to the BOT; failure to comply may lead to BOT ordering appropriate actions or closure (Section 95). - If a bank’s capital falls below 60 percent of the requirement, the BOT shall order the bank to be placed under control (Section 96). - If a bank’s capital maintenance falls below 35 percent of the requirement, the BOT shall issue an order closing the business of such bank (Section 97). - Range of sanctions (Section 89 and Section 90) - Issuing of written warning to the bank or relevant person. - Issuing an order to prohibit any action in violation or to take action in compliance. - Ordering the removal of any or all directors, managers or persons with power of management. - Appointing other persons to replace those so removed as appropriate. - Ordering such bank to rectify the condition or operation. - Ordering such bank to reduce or increase its capital or both within a specified period. - Ordering such bank to suspend its operations, in whole or in part, within a specified period. - Ordering the control of or the closure of such bank’s business. - License revocation - Where BOT orders closure of a bank, BOT shall propose to the Minister to withdraw the license (Section 93, 95 and 97). - Cooperation for orderly resolution - BOT empowered to cooperate and collaborate with relevant authorities, including the Ministry of Finance, the DPA, the SEC, the OIC, the Office of the Attorney General, or National Police Bureau. - Section 102 of FIBA: when BOT orders a bank to be placed under control, BOT shall issue a notification appointing a Control Committee consisting of a chairman and other members of at least two but not exceeding four, provided at least one member shall be proposed by the Deposit Protection Agency. - The Financial Institutions Policy Committee (FIPC) provides a forum for coordination and has a decision-making role regarding resolution schemes in crises. - BOT has signed a Cross-border Cooperation Agreement (COAG) with relevant home and host supervisory and resolution authorities of a G-SIFI to facilitate coordination in crisis preparations. ### Updating laws, prudential standards, and public consultation (EC4) - Legal updates and timeline: - After the 1997 financial crisis, the Commercial Banking Act, B.E. 2505 (1962) was replaced by FIBA which came into force in 2008. - FIBA was updated in B.E. 2558 (2015) to address emerging prudential issues related to granting of credits to bank directors, managers, and related persons where credits were approved prior to holding positions. - BOT Act amended in 2018 to implement a bank resolution framework for dealing with distressed banks with potential systemic impact; BOT proposes a resolution scheme to MOF and the Cabinet for approval and, once approved, the FIDF is empowered to implement it. - Regulatory practice: - BOT consistently updates notifications concerning current supervisory concerns and withdraws outdated notifications. - Reviews of notifications follow the Royal Decree on Revision of Law B.E. 2558 (2015), requiring law review every five years from date law comes into force or on specified grounds. - Grounds for revising law (Royal Decree) - Written petition or recommendation of an interested organization or the general public which is reasonable. - Recommendation of the Law Reform Commission. - That law has not been enforced or executed for more than three years as from the date that law comes into force. - Regulatory process and public consultation - Regulations are proposed to the Financial Institutions Policy Sub-Committee (FIPS) and approved by the Financial Institutions Policy Committee (FIPC) before public consultation. - BOT arranges a hearing with stakeholders on consultation drafts in accordance with Section 77 of the Constitution and the Royal Decree on Revision of Law B.E. 2558 (2015). - Royal Decree implementing guidelines require the State agency drafting acts to have acts heard and commented by the public via the State agency’s website for at least 15 days and provide related information such as rationale. - Council of State provides legal advice and usually arranges public consultations by post or electronic mail and publishes drafts on its website. - BOT usually has a 30-day consultation period with banks; banks expressed overall satisfaction with the BOT’s consultation process and timelines, particularly with publication of “questions and answers” as part of notifications. ### Supervision of parent companies and affiliates (EC7) - Prior approval and fit-and-proper controls: - Establishment of a financial business group requires prior approval from the BOT (Section 54). - BOT has power to review overall activities of a banking group as if they were the same legal person (Section 57). - Appointment of a director, manager, person with power of management or advisor of the parent company of a financial institution and its subsidiaries undertaking financial business requires prior approval from the BOT (Section 55). - Consolidated supervision scope: - BOT empowered to supervise groups with a financial institution as parent company and groups with a non-financial holding company as parent company. ### Assessment and compliance - Assessment of Principle 1: Compliant - Comments: - BOT has objectives and the necessary legal powers to conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns for banks. - In areas where the MOF decides based on recommendation of the BOT (licensing of a bank, 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. - BOT has been delegated statutory power in supervising SFIs according to Section 120 of FIBA and Ministerial Order Nr 433/2558, but BOT regulations and corrective actions must still be approved by the MOF. *IMF staff summary of Section 120 assignment and supervisory framework under FIBA as presented in the source PDF.* ### section 120 of FIBA and three supervisory authorities have agreed to develop a framework ### section 120 of FIBA and three supervisory authorities have agreed to develop a framework ### Incomplete transfer of responsibilities and reputational risk - Despite section 120 of FIBA and three supervisory authorities agreeing to develop a framework for responsibilities of each party, there remains a mix of roles in practice. - The BOT is empowered to issue SFIs' regulations with approval of the MOF but does not have corresponding powers to take corrective action against problems in SFIs. - This incomplete transfer of responsibilities may potentially expose the BOT to reputational risk when an SFI encounters problems because of a misperception that the BOT has full supervisory powers over the SFIs. - This weakness has been considered in the assessment of CP 2. - Thai banks have not challenged the non-binding nature of the BOT’s guidance and have complied with all recommendations imposed by the BOT examiners based on this guidance. - Banks expressed overall satisfaction with the consultation process and timelines. ### Suggested improvements to BOT consultation transparency - Assessors suggest that, 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 relevant notification. - Publishing response papers would give the BOT an opportunity to better explain its policy positions in writing. - It would further strengthen the international standing of the BOT in the regulatory community, clarify and give more prominence to BOT policy positions. ### Principle 2 — Independence, accountability, resourcing, and legal protection for supervisors - Principle statement: The supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable for the discharge of its duties and use of its resources. The legal framework for banking supervision includes legal protection for the supervisor. ### EC1 — Operational independence, accountability and governance prescribed in legislation - Findings: - The BOT Act states the BOT is a legal person which is a state agency and is neither a government agency nor state enterprise under the law on budgetary procedure and other laws (Section 5). - The BOT is self-financed; its budget is under the responsibility of the BOT Board (Section 25(1)). - The Governor shall be independent in management (Section 28/16). - The Governor has a specific term of position for five years (Section 28/18) and shall not be revoked without explicit cause as specified in Section 28/19. - The BOT Board and the FIPC are established under the BOT Act (Section 17) to undertake the BOT’s tasks set out under Section 8. - An Auditing Committee supervises the BOT’s business and reports quarterly (Section 55); the Office of the Auditor-General is the Accounting Auditor (Section 56). - The Chairman of the BOT Board, experts of the BOT Board, experts of the FIPC, and the Governor shall not be or have not been political officials (Section 18, Section 26, Section 28/17). - Those same persons shall not be a director or hold any position in a financial institution (Section 18, Section 26, Section 28/17). - The power to grant and revoke a banking license is exercised by the MOF on recommendation of the BOT. - Under FIBA, the BOT is empowered to appoint its officers or external persons as bank supervisors (Section 85 of FIBA) and to take supervisory actions when any financial institution violates or fails to comply with requirements in the Act (Division 5 of FIBA). - FIBA grants the BOT power to propose to the Minister to revoke a banking license (Sections 83, 90 (5), 93, 95, 97, 110, and 111), including cases where a bank fails to comply with the BOT’s corrective order, fails to maintain capital funds above the level required by law, or when the bank’s operations may cause damage to the public. - Any financial institution intending to dissolve or suspend its operation shall obtain prior approval from the BOT (Section 78). ### EC2 — Transparent appointment and removal processes - Findings: - BOT Board composition: Chairman appointed by His Majesty the King, the Governor, three Deputy-Governors, the Secretary-General of the Office of the National Economic and Social Development, the Director-General of the FPO, and five experts appointed by the Minister (Section 24). - Section 28/1 and Section 28/4: Minister appoints a seven-member selection committee to select the Chairman and experts; the selection committee shall vacate when the selection process and appointment are completed. - FIPC membership: Governor (Chairman), two Deputy-Governors determined by the Governor (one assigned as Deputy-Chairman), the Director-General of the FPO, the Secretary-General of the Insurance Commission, the Secretary-General of the SEC and five experts appointed by the BOT Board (Section 28/9). - Terms: - Chairman of BOT Board, experts of BOT Board, experts of FIPC hold office for a term of three years and may be reappointed but shall not hold office for more than two consecutive terms (Section 19 and Section 26). - Grounds for vacation for experts (Section 20 and Section 26): Death; Resignation; Being of 70 years of age; Disqualification or prohibited characteristics under Section 18; Absence from board meetings without reasonable excuse for more than three consecutive meetings; Being removed by the Minister upon recommendation of the BOT Board due to serious misconduct or gross incompetence if reason is specified explicitly. - Removal of Chairman, experts of BOT Board, and experts of FIPC is published in the Government Gazette and includes reason for removal. - Governor appointment and removal: - Governor is appointed by His Majesty the King upon recommendation of the Cabinet. - Minister of Finance appoints a seven-member selection committee to nominate not less than two suitable persons (Section 28/14). - Governor holds office for a term of five years and may be reappointed for not more than one term (Section 28/18). - Grounds for removal (Section 28/19): Death; Resignation; Lack of characteristics or prohibited characteristics as prescribed in Section 28/17; Being removed by the Cabinet upon recommendation of the Minister due to serious misconduct or dishonest performance; Being removed by the Cabinet upon the recommendation of the Minister or by the proposal of the Minister upon the recommendation of the BOT Board due to gross incompetence in performance or incapability, if reason is specified explicitly. - Removal of the Governor is published in the Government Gazette and includes reason for removal. ### EC3 — Publication of objectives and accountability framework - Findings: - BOT Act and FIBA specify the BOT’s objectives and are published in the Government Gazette. - All BOT notifications under FIBA come into force upon publication in the Government Gazette (Section 7 of FIBA). - BOT publishes information on roles and responsibilities on the BOT website, including objectives under the BOT Act, the BOT three-year strategic plan, the annual report and weekly reports. - BOT publishes "Financial Supervision in Practice" covering banks’ policies on supervision, examination, analysis, overview of supervisory procedures, financial businesses under BOT supervision, onsite and offsite examination, supervision of banks, asset management companies and nonbanks, troubled or non-compliant banks and supporting functions. - BOT publishes an annual supervision report with supervisory information such as overall operation of banks, supervision, and development of banks system including guidelines for future supervision and continuous development. ### EC4 — Internal governance and escalation for supervisory decisions and crisis management - Findings: - BOT has an institution-wide formal approval and escalation policy. - Supervisory recommendations or orders that do not significantly affect the bank’s overall risk are given by directors and senior directors; decisions that impact overall risk are made by assistant governors. - Any issues impacting Composite Rating are decided by the Financial Institutions Examination Development Sub-committee. - Two main high-level sub-committees: - Financial Institutions Examination Development Sub-committee (FIED) — issues related to financial institutions examination. - Financial Institutions Policy Sub-committee (FIP) — issues concerning regulatory and supervisory framework, including licensing, financial institutions development and resolution framework. - Both FIED and FIP are chaired by the deputy governor for Financial Institution Stability and consist of assistant governors, senior directors under the Financial Institutions Policy Group, Supervision Group. - Crisis Management Committee (CMC) exists to centralize supervisory decisions and take timely action during a crisis; chaired by the Governor and consists of Deputy Governors and Assistant Governors. - For liquidity assistance under Section 42 of the BOT Act, the CMC makes decisions on the resolution and amount of liquidity facilities to be provided; this is escalated to the FIPC and the Minister for final approval. ### EC5 — Professionalism, integrity, and conflict-of-interest rules - Findings: - Section 25(4) authorizes the BOT Board to issue regulations on prevention of personal benefit involvement and the code of conduct for board members, the governor, officers and employees. - Sanctions available: written reprimand, probation, salary reduction, termination by discharge or dismissal, and legal prosecution. - Senior decision makers must avoid taking positions in financial institutions for a year once they resign from the BOT for less than one year. - BOT staff and families must avoid giving or receiving gifts, money, or other benefits from interested parties; amount should not exceed THB 3,000. - Data security practices limit electronic systems access by supervisory level and department to protect confidential information. - Section 46 prohibits board members, the governor, officers and employees from acts causing conflict between personal and BOT interests. - Failure to keep information confidential may lead to imprisonment or a fine as specified by law (Section 74 of the BOT Act and Section 154 of FIBA Act). ### EC6 — Adequacy of resources, financing, and staff capacity - Findings: - BOT is self-financed with revenue from interest income, gains from foreign exchange, among others; does not rely on government funding. Budget plan approved by BOT Board (Section 25(1)). - BOT has made necessary investments in human resources, IT systems and infrastructure. - BOT has a total of 500 officers responsible for regulatory policies and supervision of licensed financial institutions in Thailand. - BOT’s salary scales are competitive with the private sector, averaging at the top quartile of the banking industry; salary structure reviewed regularly. - Training: - Average training days for each staff are approximately two weeks per year. - BOT established the School of Supervisors in 1999. - BOT sends officers to programs by SEACEN, the EMEAP Working Group on Banking Supervision, APEC, World Bank, U.S. Federal Reserve, IMF, and BIS. - Supervisors rotate across departments and undertake external secondments with confidentiality letters (e.g., JFSA, MAS, BNM). - Significant investment in IT and a centralized data management system (DMS) supporting economic and financial analysis and bank supervision. - Travel budget supports onsite work, cross-border cooperation and participation in domestic and international meetings (e.g., supervisory colleges). ### EC7 — Regular resource planning and skills gap identification - Findings: - BOT regularly reviews adequacy of skilled staff for short- and medium-term supervisory needs. - Continuous training via the School of Supervisors, seminars, lectures by experts, internships and secondments. - BOT recruits and trains staff with specialized skills such as financial engineering and IT specialists to bridge gaps. - Training needs survey conducted regularly; results inform training course development and individual training roadmaps. - Example: In 2016, training needs focused on macro prudential supervision, payment system roadmap, underwriting and credit process, financial innovation and new products, corporate governance, IFRS 9 accounting standard, and trade finance. ### EC8 — Risk-based allocation of supervisory programmes and resources - Findings: - All Thai banks are subject to onsite examination at least once a year. - Subsidiaries of foreign banks, foreign bank branches, asset management companies (AMCs) and nonbanks with level 1 or 2 rating are subject to onsite examination at least once every three years; those with level 4 or 5 rating are subject to onsite examination at least once a year. - BOT closely monitors financial institutions with level 4 rating; supervisory intervention will be implemented for financial institutions with level 5 rating. ### EC9 — Legal protection against lawsuits for actions in good faith - (Description and findings re EC9 present in source header but detailed text for EC9 is not included in the supplied content.) *Source: 1thaea2019004 - section 120 of FIBA and three supervisory authorities have agreed to develop a framework* ### Section 5 of the Act on Tortious Liability of Officials B.E. 2539 (1996) provides protection to ### 1thaea2019004 - Section 5 of the Act on Tortious Liability of Officials B.E. 2539 (1996) provides protection to ### Legal protection under Section 5 and case law - Section 5 of the Act on Tortious Liability of Officials B.E. 2539 (1996) provides protection to individual government official including the BOT personnel, whereby civil action can only be taken against the organization, not individual officer. - Under the law, the government organization must be accountable to an affected third party following the performance of duties by its officer. - Supreme Administrative Court order no. 880/2548, dated 28th December B.E. 2548 (2005): the Plaintiff cannot file a case against the Governor as the Defendant No. 2 but shall directly sue the BOT as the Defendant No. 1 which is a government agency liable to an aggrieved person for the result of a wrongful act by its officer in the performance of his duties. ### BOT internal legal assistance framework - BOT internal regulation: Assistance for Legal Proceedings and for Protection of Life, Body, and Property of Employees B.E. 2546 (2003) provides legal assistance to officers who are sued. - The legal assistance under the BOT internal regulation: - Covers all kinds of cases, not only civil case, criminal case or administrative case. - Assists the officers, not only current but also former, who carry out their duties in good faith, being accused, sued, cited as a witness, threaten or injured to life, body or property. - Includes expenses in the defense against legal proceedings and, if necessary, service of a legal officer. - If an officer is sued, the BOT will provide legal assistance so that the case may finally be dismissed on the ground that civil action should be taken against the organization rather than the individual. ### Assessment of Principle 2 — Governance, resources, and independence (Largely Compliant) - Assessment outcome: Largely Compliant - Findings: - The process for the appointment and removal of the governor and the members of the FIPC is transparent. - The BOT has adequate resources for the conduct of effective supervision and appropriate training plans. - BOT staff have credibility based on their professionalism and integrity. - The BOT regularly benchmarks its salary scales to the market and has sufficient funding to cover overseas inspections and training. - The legal framework for banking supervision includes adequate legal protection for the supervisors. - Factors with potential to interfere with BOT operational independence: - Permanent presence of the Director General of the FPO on the FIPC is not in accordance with international good practice; assessors note alternatives such as adding the Director General only in crisis times. - Presence of the Secretary-General of the Insurance Commission and the Secretary-General of the Securities and Exchange on the FIPC compromises operational independence and dilutes accountability. - Section 42 of the BOT Act: requires that when a financial institution faces a liquidity problem which may seriously endanger the stability of the economic and monetary system, the BOT, after approval of the FIPC and the Cabinet may approve the granting of a loan or financial assistance — this affects independence, risks political interference and implies government underwriting of ELA. - BOT must inform the Minister in case Prompt Preventive Action or Prompt Corrective Action is taken (see Principle 11). - The BOT has had negative net worth for several years; assessors confirm BOT has continued to discharge duties despite weak financial position, but weak financial position exacerbates risks to BOT's reputation, independence and vulnerability to political interference. - SFIs supervision and independence concerns: - Eight SFIs in Thailand, each with different mandate; four SFIs are deposit taking institutions and three comply with definition of a commercial bank in accordance with FIBA. - SFIs are regulated and supervised by the BOT with extensive involvement of SEPO as owner and the FPO as policy maker; this involvement affects BOT independence and poses reputational risk. - Supervisory governance for SFIs is handled by a separate department but reports to the Assistant Governor of the Supervision Group; supervisory governance and decision-making for commercial banks and SFIs is the same, raising risk of contamination between SFI and commercial bank decision making. ### Recommendations (from assessors) - 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. - Rotations among supervisory staff assigned to individual institutions should be formalized in a policy and enforced within the supervision groups: - Relationship managers should be rotated to other roles after 3–5 years of supervising the same institution/banking group. - A maximum period that any supervisor can be assigned to the same institution should be established, while allowing room for flexibility. ### Principle 3 — Cooperation and collaboration (Assessment: Compliant) - Principle summary: Laws, regulations or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information. - EC1 (Domestic cooperation) — arrangements and practices: - High-level cooperation: - Cross-directorships (e.g., Governor of the BOT is a board member of the SEC, the OIC, and the AMLO). - The FIPC comprises the BOT Governor (chairman), BOT Deputy Governors, the Director-General of the Fiscal Policy Office (FPO), the Secretary-General of the SEC, the Secretary-General of the OIC and five qualified expert committee members — FIPC is the decision-making body for policy affecting financial institutions. - The 3-Regulators Steering Committee (established in 2017) is a non-statutory body comprising the BOT, SEC, and OIC; Secretary Generals and high level executives meet at least quarterly; working groups include financial stability, market conduct, data sharing platform, financial technology, and cyber security. - Joint policy statement (2017) by the BOT and the SEC on corporate governance for financial conglomerates. - Working-level cooperation: - BOT, SEC, and OIC conduct semi-annual 3-Regulators Meetings since 2009. - Working groups under the 3-Regulators Steering Committee hold regular meetings and execute action plans (e.g., harmonized macro stress test framework). - BOT, SEC, and OIC jointly conducted mystery shopping for banking, securities and insurance products offered by bank branches. - Domestic Supervisory College (since 2015) with BOT, SEC, OIC and financial conglomerates to share information and monitor group risks. - Section 154 (4) of FIBA gives the BOT power to disclose information to domestic and foreign supervisors; BOT has MOUs with the SEC, the OIC, and the AMLO. - Cooperation with AMLO resulted in joint bank inspection in 2017 on KYC matters. - EC2 (Cross-border cooperation) — arrangements and practices: - BOT has MOUs with foreign supervisors in the region: Hong Kong (HKMA), Japan (FSA), Vietnam (SBV), Cambodia (NBC), India (RBI), Malaysia (BNM), Singapore (MAS), China (CBRC), Philippines (BSP), and Indonesia (OJK). - Conditions imposed when granting approval for Thai banks’ overseas branches/subsidiaries include submission of: - A certificate from the head office confirming compliance with banking acts and head office support for liquidity and capital increases. - Business plan and organizational structure. - An internal audit report of overseas branch operations conducted by the head office. - An external audit report of overseas branches. - A copy of an examination report conducted by the host supervisor together with its recommendations. - BOT actively participates in supervisory colleges and hosts supervisory colleges for internationally-active Thai banks. - BOT conducts bilateral meetings every two years with regulators in the region (Malaysia, Singapore, Indonesia, Philippines, Lao, Vietnam, China, and Hong Kong) to enhance cooperation and capacity building. - BOT participates in regional and international forums: ASEAN Economic Community (AEC), Executives' Meeting of East Asia and Pacific Central Bank (EMEAP), Supervision and Implementation Group (SIG), and FSB Regional Consultative Group (RCG). - EC3 (Sharing confidential information — safeguards in MOUs): - Section 154 (4) of FIBA empowers the BOT to disclose confidential information to facilitate supervision of domestic and foreign supervisors. - MOUs include protection clauses and safeguarding provisions: - Confidential information shall be used exclusively for lawful supervisory purposes. - All information provided shall remain the property of the Authority providing such information; Authorities shall hold confidential all information and not disclose to third party without prior written consent. - If legally compelled to disclose, the providing Authority should be promptly notified and the compelled Authority should exercise best endeavor to resist disclosure. - If information is released to a third party, it should be subject to the same confidentiality restrictions and conditions. - EC4 (Use and protection by receiving supervisor): - Section 74 of the BOT Act and Section 154 of FIBA require BOT management and staff to deny any requests for confidential supervisory information except for legal investigation, court proceeding, supervisory purpose, or otherwise required by law. - Bilateral MOUs between BOT and SEC, OIC, and DPA stipulate no information may be passed to a third party without prior consent of the originating authority; MOUs with foreign supervisors include similar clauses. - EC5 (Support for resolution authorities and crisis collaboration): - BOT is the supervisor and resolution authority for banks; DPA is responsible for paying out insured deposits and liquidating banks. - Information sharing and coordination between the BOT and DPA are stated in DPA Act and FIBA (e.g., Section 39 of DPA Act). - MOUs among domestic supervisors (BOT, SEC, OIC) cover exchange of information and coordination in times of crises; the 3-Regulators Steering Committee and the FIPC serve as forums for cross-sectoral communication. - BOT, as host supervisor of a G-SIFI, has concluded a Cross-border Cooperation Agreement (COAG) with relevant home supervisor and has attended Supervisory College and Crisis Management Group (CMG) meetings; BOT is kept informed of parts of group recovery and resolution plans. ### Key statistics and exact references (preserved verbatim) - Statutory and regulatory instrument names: - Act on Tortious Liability of Officials B.E. 2539 (1996) - Supreme Administrative Court order no. 880/2548, dated 28th December B.E. 2548 (2005) - Assistance for Legal Proceedings and for Protection of Life, Body, and Property of Employees B.E. 2546 (2003) - Section 42 of the BOT Act - Section 154 (4) of FIBA - Section 74 of the BOT Act - Section 39 of DPA Act - Organizational and structural figures and time references: - Eight SFIs in Thailand - Four SFIs are deposit taking institutions and three comply with the definition of a commercial bank in accordance with FIBA - 3-Regulators Steering Committee established in 2017 - Domestic Supervisory Colleges hosted since 2015 - Joint BOT–SEC corporate governance policy statement issued in 2017 - Supreme Administrative Court order no. 880/2548, dated 28th December B.E. 2548 (2005) - Rotation recommendation: after 3–5 years of supervising the same institution/banking group *Source: 1thaea2019004 - Section 5 of the Act on Tortious Liability of Officials B.E. 2539 (1996) provides protection to* ### Section 4 of FIBA defines the term “financial institution business” to include commercial, ### 1thaea2019004 - Section 4 of FIBA defines the term “financial institution business” to include commercial, ### Definitions and scope of “financial institution business” - Section 4 of FIBA defines the term “financial institution business” to include commercial, finance, and credit foncier (mortgage financing) business and the business undertaken by specialized financial institutions (SFI). - A commercial bank is defined as a public limited company licensed to undertake commercial banking business, and includes retail banking, and branches and subsidiaries of foreign banks. - Section 4 defines “commercial banking business” as the undertaking of the business of acceptance of money or deposits subject to withdrawal on demand or at the end of a specified period and of utilizing such money to, for instance grant credits, buy or sell of bills of exchange or any other negotiable instruments, buy and sell of foreign exchange. - Commercial bank business is specifically differentiated from "financial business" by the ability to provide checking accounts. ### Permissible activities and supervisory powers - Section 36 of FIBA empowers the BOT to allow banks to engage in activities which are connected or incidental to commercial banking business or any business traditionally regarded as commercial banking practice or any other business of similar nature. - The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined either by supervisors, or in laws or regulations. - Assessment of Principle 4: Largely Compliant - Comment: Permissible activities are limited to financial sectors. Through subsidiaries, banks may offer securities and insurance products. The role of BOT as supervisor of the SFIs continues to be developed with further work planned for the regulatory framework. ### Use of the word “bank” and name restrictions - EC3: The use of the word “bank” and any derivations such as “banking” in a name, including domain names, is limited to licensed and supervised institutions in all circumstances where the general public might otherwise be misled. - Section 9 of FIBA specifies that the commercial banking business may be undertaken only by a juristic person in the form of a public limited company, licensed by MOF with the recommendation of the BOT. - Section 11 of FIBA requires a commercial bank to use a name beginning with the word “bank,” as specified in the license. - Section 12 of FIBA specifies that no person other than a bank shall use a name or a word denoting name in a commercial banking business as “bank” or any other word that has the same meaning. ### Deposit-taking and supervision of deposit-taking institutions - EC4: The taking of deposits from the public is reserved for institutions that are licensed and subject to supervision as banks. - Institutions taking deposits from the public in Thailand include commercial banks, finance companies, credit foncier companies, and must obtain a license from MOF with the recommendation of the BOT and are subject to supervision by the BOT. - Specialized Financial Institutions (SFIs), which are also supervised by the BOT, are established under their individual act; those acts give them the right of doing business according to their mandates. - The regulatory and the supervisory approach for finance companies and credit foncier companies is like commercial banks, commensurate to their respective risk profile. - The oversight and legal framework of SFIs is being strengthened to parallel commercial banks but the process has not been completed. Revision of FIBA Section 120, which has already been published in the Royal Thai Government Gazette, will further enhance SFI supervision. ### Transparency of licensed banks list - EC5: The supervisor or licensing authority publishes or otherwise makes available a current list of licensed banks, including branches of foreign banks, operating within its jurisdiction in a way that is easily accessible to the public. - A current list of licensed banks, including branches of foreign banks, is published on the BOT website. ### Licensing authority, criteria, and revocation powers - Principle 5: Licensing criteria. The licensing authority has the power to set criteria and reject applications for establishments that do not meet the criteria. At a minimum, the licensing process consists of an assessment of the ownership structure and governance (including the fitness and propriety of Board members and senior management) of the bank and its wider group, and its strategic and operating plan, internal controls, risk management and projected financial condition (including capital base). Where the proposed owner or parent organization is a foreign bank, the prior consent of its home supervisor is obtained. - EC1: The law identifies the authority responsible for granting and withdrawing a banking license. - The BOT is the sole authority responsible for banking supervision while the licensing authority is the MOF. - Under Section 9 of FIBA, commercial banking business is undertaken only by a public limited company, licensed by the MOF with the recommendation of the BOT, who processes the application. - Under FIBA Section 10, the MOF is empowered to grant a license for a foreign commercial bank that wishes to establish a branch in Thailand, with the recommendation of the BOT. - In granting the license, the MOF may impose additional prudential conditions as deemed necessary. - The BOT is responsible for accepting the application, assessing applicants against the set criteria, and providing recommendations concerning qualifications of the applicants to the MOF. - Throughout the application process, the BOT and the MOF share information to address any issues concerning the application. - A banking license may be revoked by virtue of FIBA Sections 83, 90 (5), 93, 95, 97, 110, and 111 in cases such as when the bank fails to comply with BOT’s corrective order, fails to maintain capital funds above the level required by the BOT, or when the bank’s operations may cause damage to the public, in which case the BOT has the power to order a suspension of business operations, removal of directors, or closure of the bank. After the BOT orders the bank closure, the BOT shall propose to the MOF that the bank’s license be revoked. - Any bank intending to dissolve or suspend its operation shall obtain prior approval from the BOT (Section 78). - EC2: Laws or regulations give the licensing authority the power to set criteria for licensing banks. If the criteria are not fulfilled or if the information provided is inadequate, the licensing authority has the power to reject an application. If the licensing authority or supervisor determines that the license was based on false information, the license can be revoked. - Section 9 of FIBA empowers MOF to establish licensing criteria, with the advice of BOT. - The BOT may recommend to MOF to reject an application if it determines that the applicant does not meet the established criteria. - Both the BOT and the MOF have the right to request any information in addition to the documents required by the Licensing Notification. For example, the bank may be asked to declare any wrongdoings by the directors and/or managers with significant damage to the public over the past three years. - If information supplied in the application is later deemed to be false, the MOF has the power to revoke the license. *Source: https://www.imf.org/-/media/files/publications/cr/2019/1thaea2019004.pdf* ### Chapter 6 of Administrative Procedure Act, B.E. 2539 (1996 ### Chapter 6 of Administrative Procedure Act, B.E. 2539 (1996 ### EC3 — Consistency of licensing criteria with ongoing supervision - Licensing considerations applied by the BOT for a foreign bank’s subsidiary include: - (i) feasibility of the bank’s business plan and strategy - (ii) risk management - (iii) capital ratio/ fund - (iv) fit and propriety of directors and high-level management - These factors are continuous in nature and are evaluated alongside ongoing supervision activities such as: - annual onsite examinations - quarterly report reviews - Ongoing supervision assesses: - compliance with prudential standards - strategic direction - risk management capacity commensurate with the risks arising from the bank’s Significant Activities - Remedial actions available: - BOT visits or requests for further information to reassess compliance with prudential and licensing requirements ### EC4 — Structures permit effective solo and consolidated supervision - Licensing authority requirements: - Determine proposed legal, managerial, operational and ownership structures will not hinder effective solo or consolidated supervision - Where appropriate, determine structures will not hinder effective implementation of corrective measures - Findings: - No applications filed since 2014, but procedures exist to prevent hindrance from complex structures - BOT has rejected or required changes in applications for change in ownership or organizational restructuring - BOT reviews: - appropriateness of ownership and corporate expertise of board of directors, committees, sub-committees, and senior management - organizational structure compliance with BOT corporate governance and fit-and-proper standards - Consent letter from home supervisor is required for foreign banks; further information may be obtained via teleconferences, meetings and MOUs ### EC5 — Identification and suitability of major shareholders and UBOs - BOT assesses: - major shareholders including ultimate beneficial owners - transparency of ownership structure - sources of initial capital and ability to provide additional financial support - Process and documentation: - Review credit rating reports and annual reports from the past five years for equity holding structure - Foreign bank subsidiaries must identify the 10 largest shareholders of the parent bank - Suitability assessment covers parent bank’s financial standing, source of funds, expertise relevant to the business plan - Executives, shareholders, and proposed executives must meet BOT fit and proper criteria - BOT identifies controlling entity to ensure enforceable supervisory measures - Business plan must include capital raising plan, source of funds and credit plan - BOT requires a letter confirming commitment to provide liquidity support and capital increases as needed ### EC6 — Minimum initial capital - Minimum initial capital is determined on a case-by-case basis considering: - scope of proposed business (full commercial bank or retail bank) - number of branches and ATMs allowed - economic environment, financial sector development and financial system resiliency - Historical minimums and equivalents: - 2004: finance company or credit foncier converting to retail bank required initial tier-1 capital no less than THB 250 million (as of August 31, 2018, equivalent to USD 7.6 million) - 2004: conversion to commercial bank required initial tier-1 capital no less than THB 5,000 million (as of August 31, 2018, equivalent to USD 152.9 million) - 2011: retail bank upgrading to full commercial bank required initial tier-1 capital no less than THB 10 billion (equivalent to USD 305.8 million); same amount required in paid-up capital for an upgrade from a foreign bank branch to a foreign bank subsidiary - 2013: new subsidiary of a foreign bank required minimum paid-up capital of THB 20 billion (equivalent to USD 611.7 million) ### EC7 — Fit and proper assessment of board and senior management - Fit and proper criteria include: - skills and experience commensurate with intended activities - no record of criminal activities or adverse regulatory judgments - BOT application requirements: - Profiles for proposed Chairman of the board; Chairman of the executive board and/or Chief Executive Officer; and managers or equivalent positions - Profile details include academic qualifications, work experience, history of lawsuits or convictions (civil and criminal), and list of related businesses - Post-MOF approval: - Bank must commence operations within one year - Bank must submit list of persons to be appointed as directors, managers and persons with power of management for BOT approval - Appointees must not possess prohibited characteristics specified in Section 24 of FIBA and must meet fit and proper criteria per BOT Notification No. FPG. 11/2561 - Fit and proper considerations: (i) honesty, integrity and reputation; (ii) competence, capability and experiences; (iii) financial soundness - Compliance checks include other Thai and international regulators, criminal records and Anti-Money Laundering Office ### EC8 — Review of strategic and operating plans, governance and controls - License application requires a detailed business plan demonstrating: - ability to establish risk management systems commensurate with business operations and Significant Activities - appropriate information technology system and management - extent to which risk management systems will be based in Thailand - internal controls and AML/CFT program - outsourcing policy and oversight for proposed outsourced functions - Pre-commencement supervision: - Quarterly progress reports to BOT during the one-year pre-operation period - Prior to commencing operations, BOT conducts a thorough onsite examination of: - organizational structure, operational systems, policy making procedures, reporting lines, risk management systems, internal control mechanisms, workflow process - BOT grants approval to commence operations only if all systems are adequate ### EC9 — Pro forma financial statements and projections - Business plan submission must include: - (i) business strategy - (ii) pro-forma financial statements for no less than three years, with documentation on assumptions made - (iii) plan for establishment of head office, branch or financial business group - BOT reviews adequacy of financial strength to support the strategic plan and operations - For foreign bank subsidiaries: - BOT requires confirmation letter from parent bank to provide liquidity and capital support if subsidiary’s capital fund falls or may fall below legally required level - BOT considers parent company’s experience, expertise, performance, financial standing, risk management and governance ### EC10 — Home supervisor non-objection and consolidated supervision - Foreign bank application requirements: - Consent letter from home supervisor allowing establishment of branch or subsidiary and confirming no concern on the bank’s financial soundness and integrity - Information on home country’s consolidated supervision regulatory regime - BOT considerations: - soundness and credibility of home supervisor in applying international standards - nature of supervisory relationship and cooperation channels (MOUs, involvement in EMEAP and SEACEN) to obtain information when needed ### EC11 — Monitoring progress of new entrants - BOT monitors new entrants for compliance with licensing requirements, business and strategic goals - New banks subject to ongoing supervision including reporting requirements, meetings and examinations - Significant deviations from intended strategic targets are addressed via strategic risk assessment ### Assessment and related outcomes - Assessment of Principle 5: Compliant - Comments: - Applications for new banks accepted only in pre-determined periods; last period closed in 2014; four licenses were granted - One application denied in 2016 because it was filed after closing of the 2010–2014 licensing period established in the Financial Sector Master plan - Application reviewed included request for a waiver on paid-in capital at inception; BOT denied and MOF concurred ### Principle 6 — Transfer of significant ownership (overview and key legal thresholds) - EC1 — Definitions: - “Major shareholder” defined in Section 4 of FIBA as holding or possessing shares exceeding 5 percent of outstanding shares, including shares held by related persons - Control defined in Section 4 of FIBA as: - Holding more than 50 percent of a company’s total shares - Having power to control majority of votes in a shareholders’ meeting - Having power to control appointment or removal of persons with power of management or at least one-half of the company’s board of directors - Having power to control the company’s operations in any other manner as prescribed by the BOT - A person is presumed to have a controlling interest when holding 20 percent or more of outstanding shares - EC2 — Notification and approval thresholds: - Section 17 of FIBA: any person holding or possessing 5 percent or more of outstanding shares must report to the BOT per BOT Notification No. FPG. 57/2551 - Section 18 of FIBA: any person seeking to hold more than 10 percent of outstanding shares must obtain prior approval from the BOT; approval requires demonstration of benefits and meeting BOT criteria (fit and proper, financial soundness, relevancy of expertise and experience, business networks) - Section 16 of FIBA: non-Thai shareholding limited to 25 percent unless permitted; BOT may permit up to 49 percent; MOF, with BOT recommendation, may permit exceeding 49 percent only to rectify or strengthen operations or preserve financial system stability and may impose additional conditions - EC3 — Supervisor’s power to reject or reverse ownership changes: - Section 18 requires prior BOT approval for holdings over 10 percent (including indirect holdings through related persons) - Section 21 prohibits payment of dividends or granting voting rights to shares held in contravention of Section 18 - BOT applies fit and proper criteria comparable to licensing, verifying AML/CFT, criminal records, and supervisory sanctions via AMLO, Royal Thai Police and other regulators - BOT may reject acquisitions, or modify or reverse approvals if change based on false or misleading information (authority via Chapter 6 of the Administrative Procedure Act B.E. 2539) - If required, the person must dispose of excess shares within period prescribed by BOT _Italic: Source: Chapter 6 of Administrative Procedure Act, B.E. 2539 (1996) — extract provided in source content._ ### Section 19 of FIBA empowers the BOT to file a motion to the court to order the disposal of ### Section 19 of FIBA empowers the BOT to file a motion to the court to order the disposal of ### EC4 — Identification of significant shareholders and beneficial owners - Requirement: Banks must register as public limited companies. - Disclosure rule: Section 8 of SEC’s Notification: Rules, Conditions and Procedures Governing the Disclosure of Information and Other Acts of a Listed Company requires disclosure of the 10 largest shareholders in annual reports. - Section 22 of FIBA requires the bank to: - examine its register of shareholders prior to each shareholder’s meeting, or prior to each distribution of dividends or any other form of benefits; and - report the findings to the BOT. - Report contents under Section 22 must include: - the names, related persons (including beneficial owners), and equity holdings of any person in possession of more than 5 percent of the bank’s total shares. - Sanctions for non‑compliance with Section 22 (Section 125 of FIBA): - fine of up to THB 500,000; and - additional fine of THB 5,000 per day during the violation period. - Supervisory practice: - BOT issued a letter to the Thai Bankers' Association and the Association of International Banks requesting reporting of equity holdings held through nominees and custodians and any other vehicles that may be used to disguise ownership. - During onsite visits, supervisors review whether holdings of shares through nominees are compliant with relevant laws. ### EC5 — Power to address unauthorized change of control - Monitoring: BOT monitors changes in significant ownership through periodic reports and onsite visits. - Remedy under Section 19 of FIBA: - If a person failed to obtain prior approval to hold shares in an amount exceeding 10 percent, the BOT can apply to the court for an order for the sale of the excess shares held by auction or any other methods. ### EC6 — Notification of material information affecting suitability of major shareholders - Banks are required to notify the BOT of any information that may negatively affect their major shareholders’ fit and proper status (examples include significant adverse changes in the shareholder’s financial position, or supervisory actions by other Thai or international regulators). - For a foreign bank’s subsidiary: - after the MOF has approved its establishment, any change in the foreign bank’s shareholders or its parent company must have obtained prior approval by the BOT; - the BOT may impose additional conditions as deemed necessary. ### Assessment of Principle 6 - Assessment: Compliant - Comment: Since 2017 there have been two significant ownership changes approved and two denied. - One denial was due to failing the fit-and-proper review. - One denial was due to the proposed ownership structure that would have hindered consolidated supervision. ### Principle 7 — Major acquisitions (EC1: Acquisition and Investment limits) - Legal basis: Chapter 3 Division 2 of FIBA establishes acquisition/investment limits; Section 34 of FIBA sets specific limits. - Individual limits (Section 34, 2 and 3): - No financial institution shall hold shares in any company in an amount exceeding 5 percent of the financial institution’s capital funds. - No financial institution shall hold more than 10 percent of the company’s outstanding shares. - Aggregate limit (Section 34, 1): - No financial institution shall invest more than 20 percent of total capital funds, in the aggregate holding of shares in all companies. - BOT exceptions: - BOT may grant approval to hold shares exceeding the limits only when such acquisition is due to debt restructuring, debt repayment, enforcement of debt payments, providing security for granting of credits, or for the operation of a supporting business. - Under BOT’s consolidated supervision, a financial institution is allowed to hold shares in excess of the aforementioned limits, provided that the company is in the financial institution’s Financial Business Group and the company is permitted to undertake only: - financial businesses such as commercial banking, finance, credit foncier, hire, purchasing, leasing, or - supporting businesses that complement the operation of the financial institution and its Financial Business Group. - The financial institution and its holding company are also permitted to conduct Venture Capital (VC) business that invests in SMEs or Financial Technologies (FinTech). - For other businesses, the BOT may grant approval on a case-by-case basis for 10 year and set aggregate limit at 3 percent of capital. - Additional prohibition (Section 35 of FIBA): - financial institutions are prohibited from holding shares or securities of other financial institutions undertaking business of the same type to that of the financial institution. *1thaea2019004 - Section 19 of FIBA empowers the BOT to file a motion to the court to order the disposal of* ### Section 80 (2) of FIBA prohibits financial institutions from purchasing or holding real ### Section 80 (2) of FIBA prohibits financial institutions from purchasing or holding real ### Legal restrictions and permitted holdings - Section 80 (2) of FIBA prohibits financial institutions from purchasing or holding real estate/fixed assets except for: - Those used as premises for the business or as places of residence or welfare facility for their officers and employees, as permitted by the BOT. - Those acquired as debt settlement, a guarantee in respect of credit granting or the purchase of an immovable property mortgaged to the financial institution at an auction conducted pursuant to an order of a court or an official receiver. - Banks cannot reduce capital without permission of the BOT (Section 80(1) of FIBA). ### Criteria for judging individual acquisitions and investments (EC2–EC5) - The BOT’s internal manual sets criteria to judge individual investments, including: - The business types of the proposed investment (financial businesses e.g., leasing, factoring, credit card business; or support functions e.g., legal, MIS, IT Infrastructure). - The commitment and readiness of the bank (funding, personnel, MIS and support functions). - Whether the investment gives the bank controlling power (e.g., holding of shares more than 50 percent or controlling majority votes). - Investments through VCs: - The investee must demonstrate growth potential and must not be related to the financial institution or its parent company (as defined in Section 4 of FIBA). - Direct and indirect investments in a FinTech company must not exceed 3 percent of the financial institution’s total capital, and total investments in FinTech through VCs must not exceed 30 percent of the financial institution’s total capital. - BOT due diligence requirements prior to approval include: - Analysis of financial and managerial resources, risk management, business and strategic plan and a gap analysis comparing BOT regulations to host country regulations. - For cross-border targets, demonstration that host country laws do not prohibit required information flows and consolidated reporting; inability to provide consolidated reports is valid ground for prohibition. - Conditions for approval: - Target must submit a letter consenting to be consolidated in the Financial Business Group and to comply with BOT consolidated supervision regulations and consent to BOT examinations. - BOT may reject proposals if reporting requirements cannot be met or host country regulations undermine BOT’s consolidated supervision. ### Supervisory approach and risk-based supervision (Principle 8) - BOT uses a risk-based supervisory approach monitoring: - (i) Impact of banks/banking groups on the financial system (size, interconnectedness, lending to sectors). - (ii) Significant risks to which banks/groups are exposed. - Risk assessment methodology: - Assess significant activities on two dimensions: inherent risks (IR) and quality of risk management (QRM). - Derive net risk rating per significant activity from IR and QRM. - Aggregate net risk ratings weighted by impact of each activity to determine overall net risk rating. - Derive composite rating (level 1 for strong to 5 for very weak) from overall net risk ratings and assessment of capital adequacy, earning ability, oversight, governance, and compliance. - Supervisory cadence and intensity: - Onsite examinations of all deposit-taking institutions annually; foreign branches/subsidiaries at least once every three years. - Allocation examples: "20 supervisors and 40 working days" for a large bank > 10 percent of total assets of Thai commercial banks; "12–14 supervisors and 30 working days" for a small to medium-sized bank < 10 percent; "10 supervisors and 10 working days" for a foreign bank subsidiary or branch. - Offsite exam allocation: 1–3 supervisors depending on size and complexity. - D-SIB framework implemented since 2017; higher loss absorbency capital percentage required; BOT meets D-SIB boards annually. - Forward-looking tools: - Early warning indicators (EWI), supervisory stress tests, monitoring of leading indicators and EWI ratios (financial position, profit and loss, capital (BIS ratio), credit risk, market risk, liquidity risk). - Risk assessments reviewed at least quarterly (semiannually for foreign branches/subsidiaries). ### Supervisory techniques and tools (Principle 9) - Integrated onsite and offsite supervision: - Offsite: ongoing monitoring of financial conditions, trend analysis, regular contacts with management and external auditors. - Onsite: verification of issues from offsite reviews, combination of top-down interviews and bottom-up transaction testing; may include non-bank subsidiaries if significant. - Planning and quality assurance: - Dedicated Planning and Examiners Development Department plans annual onsite activities; annual plan approved by the Financial Institutions Examination Development Subcommittee. - Onsite and offsite functions combined under a relationship manager (RM) since 2016 for better integration. - Findings and composite ratings subject to peer comparison and review by senior panels and approval by top executive subcommittee. - Supervisory information systems and tools: - Data Management System (DMS) for electronic submissions. - Business Objects, Tableau, SAS for queries and analysis. - Financial Institutions Monitoring and Analysis System (FIMAS) for comprehensive financial and risk data and early warning indicators. - Electronic Working Paper (EWP) system supports planning, recording findings, tracking issues, and follow-up. - FI@aClick serves as an MIS for relationship managers and BOT senior management. ### Supervisory reporting (Principle 10) - BOT powers and reporting scope: - Under Section 71 of FIBA and BOT Notification No. ITG. 11/2559, BOT may require banks and group entities to submit information at any interval or form. - Types of required reports include financial condition/performance, strategic direction, and risks (capital adequacy, liquidity, risk concentrations, asset quality, provisioning, related party transactions, interest rate risk, market risk, operational risk). - Reporting frequency varies: daily, bi-weekly, monthly, quarterly, half-yearly, and annually (e.g., FX transactions reported daily; business plan annually). - Event reporting and timeliness: - Banks must report events that may significantly affect reputation, financial condition, or liquidity (e.g., cyber-attack, fraud) promptly and no later than 24 hours after acknowledgement. - Banks required to notify the BOT in advance or seek approval for significant changes in activities, structure or condition (examples: establishment of financial conglomerate, mergers and acquisitions, holding shares above BOT-specified level, outsourcing strategic functions, engaging in new businesses, dissolving operations, capital reduction). - Data validation and enforcement: - DMS submissions subject to three-stage validation: (i) Basic validation, (ii) Complex validation, (iii) Cross validation. - BOT may appoint an external auditor or specialist under Section 71 at the bank’s expense if information is incomplete/ambiguous. - Non-compliance may lead to fines under Section 128 and criminal liability for directors/managers under Section 139. - Specific deadlines and reporting practices: - Banks must report remedial plan progress within 30 days from BOT letter issuance; for significant control weaknesses, quarterly status updates may be required. - BOT sends formal examination report and requires Board acknowledgement within 15 days from date of the board meeting. - External auditors must notify BOT of significant issues within 90 days from the end of accounting period (BOT Notification No. FPG. 5/2558) and promptly report suspected fraud under Section 70. ### Resolvability, recovery planning, and crisis management (Principle 8 EC6–EC7) - Recovery and resolution planning: - BOT requires banks to submit recovery plans and provide essential information for resolution plans (BOT Notification FPG No. 16/2561 and Guideline on Recovery Planning). - Phased implementation: D-SIBs required to submit recovery plans starting in 2018, expected to submit by Q2 2019. - Recovery plans must identify critical functions, critical shared services, interdependencies, and demonstrate feasibility of recovery options including separation or cessation of business parts while maintaining critical services. - Crisis management framework and actions: - BOT has a crisis management framework and workflows for key steps and supervisory actions by stage/severity. - Supervisory measures include requiring liquidity restoration plans, prohibiting dividend payments, replacing board/management, suspension of operations, and, for systemic insolvency, collaboration with resolution authority and other agencies. - BOT may provide liquidity support under Section 41(1) and 42 of the BOT Act. - For non-systemic insolvency BOT may order closure and coordinate with Deposit Protection Agency (DPA). - For systemic insolvency BOT collaborates with FIDF, SEC, OIC and proposes resolution schemes to MOF and Cabinet; FIDF empowered to implement Cabinet-approved schemes. ### Corrective and sanctioning powers (Principle 11) - Prompt Preventive Action (PPA): - BOT monitors indicators and applies PPA when warning triggers are breached but before regulatory thresholds. - Possible measures: require internal control improvements, improve liquidity management (e.g., LCR), increase provisions, limit asset growth, require higher capital or recapitalization plan, find strategic partners, prohibit non-standard payments to shareholders (Section 94). - BOT may withhold approvals for new activities or branches if problems persist. - Prompt Corrective Action (PCA) and statutory powers: - If a bank’s capital fund is lower than required (Sections 95–97 of FIBA), BOT can: - Order a rectification plan (Section 95). - Place bank under control if capital fund < 60 percent of required level (Section 96). - Order closure if capital fund < 35 percent of required level (Section 97). - Where condition/operation may cause public interest damage, BOT can order remedial actions, capital adjustments, suspension of operations, removal of directors/managers, or propose license revocation to MOF (Sections 90, 92). - Sanctions and individual accountability: - BOT can sanction banks and individuals (directors, managers) including fines and imprisonment for failing to secure accuracy of returns or breaching laws (Sections 128, 134–136, 139–147). - External auditors, appraisers, or specialists providing false or misleading information may be fined or imprisoned (Section 148). - Ring-fencing and restrictions: - FIBA and BOT Act do not explicitly stipulate ring-fencing measures for local branch assets, but Section 32 provides a minimum asset maintenance requirement for local branches; foreign branches required to maintain total capital ratio of 8.5 percent of risk-weighted assets. - BOT may order restrictions on transactions with affiliated companies or prohibit non-standard payments if they reduce capital below required levels (Section 94). ### Governance of supervisory functions and quality assurance - Internal oversight: - BOT internal audit periodically reviews supervision processes; the Chief Audit Executive reports to the Audit Committee. - Examples of internal audit focus areas by year: onsite and offsite examination (2015), compliant management (2016), SFIs/IT supervision/payment system/school of supervisors (2017), Fintech/ongoing supervision/market conduct (2018). - Use of external experts: - BOT has the power under Section 85 to appoint third parties but has not outsourced prudential responsibilities to third parties. - External auditors are required to report material shortcomings to BOT (Section 69 and BOT Notification No. FPG. 5/2558); auditors must promptly notify BOT of suspected fraud (Section 70). *Source: 1thaea2019004 - Section 80 (2) of FIBA prohibits financial institutions from purchasing or holding real* ### Chapter 5 of FIBA sets guidelines, procedures and timeframes for the BOT to implement ### Chapter 5 of FIBA sets guidelines, procedures and timeframes for the BOT to implement ### Corrective measures and statutory timeframes - Under Section 95 of FIBA, banks whose capital adequacy level is below the minimum regulatory requirement must submit a recapitalization plan within 60 days and the BOT must inform the bank whether the plan is approved within 30 days from the day the BOT has received the plan. - Under Section 110 of FIBA, in case where the BOT orders a bank to be placed under control, the BOT shall give an order whether the report from the bank control committee is approved within 15 days from the day the BOT has received the report. - Under Section 73 of the BOT Act and Section 157 of the Criminal Code, penalties shall be imposed on any official who dishonestly exercises or omits to exercise his / her duties, causing damage to any other person. ### Coordination with non-bank supervisors (AC2) - When taking formal corrective action in relation to a bank, the supervisor informs the supervisor of non-bank related financial entities of its actions and, where appropriate, coordinates its actions with them. - In supervising banks and banking groups, the BOT coordinates with other relevant supervisory authorities via regular forum, contacts and exchange of information and points of concern. - The BOT has jointly conducted thematic examination and coordinated actions with the SEC and OIC to enhance market conduct in the banking system. - At the policy level, the BOT coordinates with other supervisory authorities through the Financial Institution Policy Committee (FIPC), which consists of the BOT, the SEC, the OIC and the MOF. - Any liquidity assistance to systemically important banks also needs to be approved by the FIPC. ### Assessment of Principle 11 - Assessment: Largely Compliant - Comments: - The BOT has well-developed operational policies and guidance for the application of enforcement to ensure bank implementation of preventive and corrective orders from BOT. - The internal operating guidance is outlined in the Guideline for Enforcement of Prompt Preventive Action and Prompt Corrective Action and other internal documents. - FIBA establishes the detailed legal framework supporting the BOT enforcement program. *Source: Chapter 5 of FIBA sets guidelines, procedures and timeframes for the BOT to implement* ### Chapter 5 of FIBA provides the BOT with a broad range of possible measures to address ### 1thaea2019004 - Chapter 5 of FIBA provides the BOT with a broad range of possible measures to address ### Corrective measures under Chapter 5 of FIBA: findings - Chapter 5 provides the 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 the application of the measures outlined in Chapter 5. - Under the Guideline for PPA and PCA, implementation of Chapter 5 corrective action by BOT is linked to “Weak” banks, thus not initiating until the bank is exhibiting significant weaknesses. - 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 that may cause damage to public interest and requires notification to MOF if corrective action is applied. - BOT representatives indicated most of the 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). ### Corrective measures under Chapter 5: recommendations - 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. ### Consolidated supervision (Principle 12): summary assessment - Assessment: Compliant. - Comment: BOT supervises FBG which are headed by banks; for those headed by holding companies, BOT can request all information required for proper supervision and perform fit-and-proper tests on significant shareholders, directors and management. Changes to FBG structure must receive BOT approval. Review revealed full familiarity with ownership, activities, and condition of the groups. ### Principle 12 — Essential Criteria (EC) findings (EC1–EC7) - EC1: BOT supervises locally-incorporated banks on both solo and consolidated basis, including domestic and cross-border operations and material non-banking activities. BOT reviews group structure, governance (including fit & proper assessments), risk management, capital, and scope of business. Establishment or significant change to a group requires prior BOT approval. BOT stipulates scope of business to include only financial businesses or supporting services. (BOT Notification No. FPG. 5/2560, 8/2561, 9/2561, 8/2560 and 9/2560) - EC1 — Ongoing supervision: For significant affiliates (SA), supervisors will: - Conduct ongoing/offsite review through information from approvals, regular reports, Board minutes, internal audit reports, examination reports from other supervisory authorities, news, and discussions with senior management. - Evaluate effectiveness of organizational structure, processes, and risk monitoring during onsite examinations; conduct onsite examination of significant subsidiaries. - Coordinate with other regulatory authorities both domestic (such as the SEC and OIC) and cross-border. - Require rectification, additional capital, or conditions if significant non-compliance or deficiencies found. - EC2: BOT imposes prudential standards on a consolidated basis covering capital adequacy, liquidity, large exposures, related-party exposures, lending limits, and group structure (BOT Notification No. FPG. 5/2560, 8/2561, 9/2561, 8/2560 and 9/2560). - EC2 — Data collection and analysis: BOT collects information including applications for group establishment, organizational structure, senior management, 3-year business plan, internal audit reports, external audit reports, financial statements, capital adequacy, liquidity, large exposures, NPLs, loans outstanding, loan provisions, related party transactions, and lending limits through DMS and onsite visits. - EC3: BOT requires prior approval for establishment of cross-border branches/subsidiaries and stipulates conditions to ensure adequate oversight and access to material information. Banks must appoint staff to inspect foreign subsidiaries at least once every two years and submit internal audit reports to BOT; BOT must be able to conduct onsite examinations abroad. BOT assesses board structure, systems for receiving complete/accurate/timely information, and local management capability. BOT considers host supervisors’ results and observations in supervisory focus and can require remedial actions when significant issues identified. - EC4: BOT conducts onsite examinations of foreign affiliates based on risk and significance: - Onsite examinations focus on foreign affiliates significant to the Thai system. - If SA, BOT performs onsite examinations on head office business units overseeing overseas operations and randomly visits overseas branch/subsidiary once a year. - If not SA, BOT conducts onsite examinations/visits at head office business units and/or visits overseas operations periodically. - BOT communicates with host regulators via supervisory colleges and onsite visits. - EC5: BOT reviews main activities of parent companies and affiliated companies during approval and ongoing supervision; can require additional provisions or capital, remedial actions, or refrain from activities if risks are not properly managed. - EC6: BOT limits range of activities or locations if activities compromise safety and soundness, if oversight by other supervisors is inadequate, or if effective consolidated supervision is hindered. BOT may require additional provisions or capital, remedial actions, cessation of overseas operations in case of excessive risk. - EC7: BOT supervises both on consolidated and stand-alone bases, monitors intra-group transactions, assesses policies/processes for intra-group transactions to manage risks and conflicts of interest. ### Principle 12 — Additional Criterion AC1 - AC1: For corporate ownership of banks, BOT enforces fit and proper standards for owners and senior management of parent companies per Section 55 of FIBA. Requirements apply to: - A major shareholder or ultimate shareholder holding more than 10 percent of total number of parent company’s shares. - A director, a manager, a person with power of management, or an advisor of the bank’s parent company. - BOT Notification No. FPG. 8/2560: BOT approves directors, managers, persons with power of management, or advisors of parent non-operating holding companies and the highest person of management of subsidiaries in the banks’ solo consolidation group. - BOT assesses board and senior management characteristics and may require corrective action if concerns arise. ### Home-host relationships (Principle 13): summary assessment - Assessment: Compliant. - Comment: BOT organized and participated in supervisory colleges; as host supervisor BOT attended four supervisory colleges in 2017 and two in 2018; as home supervisor BOT organized one supervisory college in 2018 and two in [text ends]. ### Principle 13 — Essential Criteria (EC1–EC10) findings - EC1: BOT organizes bank-specific supervisory colleges for systemically important Thai banks with material cross-border operations; uses BCBS good practice principles as benchmark and periodically reviews membership. Objectives include developing understanding of group risk profile and sharing supervisory concerns; includes sessions with senior management. - EC2: BOT shares information bilaterally and via colleges on financial information, material risks, risk management practices, and supervisory assessments through written mail, emails, phone calls, meetings during onsite visits, bilateral meetings (e.g., Financial Supervisory Commission Taiwan, Monetary Authority of Singapore), and supervisory colleges. BOT has MOUs on Banking Supervision with Japan, China, Hong Kong, Vietnam, Singapore, Indonesia, and Cambodia; latest revisions include crisis management and resolution. BOT is negotiating a new MOU with Laos. - EC3: BOT coordinates supervisory activities and collaborative work with other supervisors. When planning onsite visits of overseas operations, BOT issues letters to host supervisors outlining objectives and agenda, meets host supervisors during visits, and issues formal letters to update host supervisors on important examination results. As host supervisor, BOT receives similar communications and participates actively in supervisory colleges. - EC4: BOT has established communication channels (emails, phone, written mail, bilateral meetings, supervisory colleges) and works with host supervisors to set agendas reflecting risk profile and systemic importance. - EC5: BOT coordinates with national resolution authorities and relevant host authorities on cross-border crisis cooperation and coordination, exchanging information subject to confidentiality. BOT has MOUs and Cross-border Cooperation Agreements with relevant authorities for Global-Systemically Important Financial Institutions to facilitate crisis coordination. - EC6: BOT requires locally-incorporated banks to submit group-wide recovery plans and provide information for resolution plans. Cross-border cooperation on recovery and resolution plans is in its infancy. BOT has concluded a Cross-border Cooperation Agreement (COAG) and participates in supervisory colleges and Crisis Management Group (CMG) meetings for Global-Systemically Important Financial Institution. - EC7: Under FIBA, definition of “financial institution” covers banks incorporated in Thailand, subsidiaries of foreign banks, and foreign bank branches; branches and subsidiaries of foreign banks are subject to prudential, inspection and regulatory reporting requirements similar to domestic banks. - EC8: BOT seeks consent or informs host supervisors before visiting overseas branches/subsidiaries; sends formal letters with objectives and schedules and meets host supervisors during visits. As host supervisor, BOT allows home supervisors access to branches/subsidiaries in Thailand following formal notification procedures. - EC9: BOT does not allow shell banks or booking offices in Thailand. BOT has a strict licensing regime assessing applicants’ business plans to ensure real banking business and effective oversight by head offices/home supervisors. BOT stipulates approval for appointment of directors, managers, authorized persons or advisors per BOT Notification No. FPG. 11/2561. - EC10: When taking consequential action based on information from another supervisor, BOT consults with that supervisor to the extent possible prior to action. BOT reviews information from home and host supervisors through various channels and will consider further examinations and orders if concerns remain. To date, consequential actions have not been needed as banks have acted on supervisory observations. *Source: 1thaea2019004 - Chapter 5 of FIBA provides the BOT with a broad range of possible measures to address* ### 2016. In view of the insignificance of the foreign operations, this is considered adequate. ### 1thaea2019004 - 2016. In view of the insignificance of the foreign operations, this is considered adequate. ### Overview - The assessors concluded that cross border operations are supervised with effectiveness and intensity sufficient to be working effectively. - No shortcomings were identified in the current practices regarding cross border supervision. - "In view of the insignificance of the foreign operations, this is considered adequate." ### Prudential Regulations and Requirements — Principle 14 (Corporate governance) - Principle 14: "The supervisor determines that banks and banking groups have robust corporate governance policies and processes covering, for example, strategic direction, group and organizational structure, control environment, responsibilities of the banks’ Boards and senior management,38 and compensation. These policies and processes are commensurate with the risk profile and systemic importance of the bank." ### Essential criteria — EC1 (Responsibilities and supervisory guidance) - EC1: "Laws, regulations or the supervisor establish the responsibilities of a bank’s Board and senior management with respect to corporate governance to ensure there is effective control over the bank’s entire business. The supervisor provides guidance to banks and banking groups on expectations for sound corporate governance." ### Description and findings re EC1 - Relevant statutory provisions: "Section 24, 25 and 55 of FIBA gives the BOT the power to require a financial institution, a holding company as the parent company, and subsidiaries in the solo consolidation to obtain prior approval from the BOT before appointing a director, manager, person with power of management or advisor of a financial institution or a holding company and a person with the highest power of management of subsidiaries in the solo consolidation." ### Supervisory conclusion on corporate governance oversight - The supervisor has statutory authority under Section 24, 25 and 55 of FIBA to approve senior appointments across financial institutions, holding companies, and consolidated subsidiaries. - This authority supports the supervisor’s ability to establish responsibilities and provide guidance as required by EC1. *Source: 1thaea2019004 - 2016. In view of the insignificance of the foreign operations, this is considered adequate.* ### Section 41 Clause 3 (3) of FIBA prescribes that where it is necessary for the stability of a ### 1thaea2019004 - Section 41 Clause 3 (3) of FIBA prescribes that where it is necessary for the stability of a ### Regulatory framework and supervisory powers - Section 41 Clause 3 (3) of FIBA: where necessary for the stability of a financial institution and for examination by the financial institution examiner, the BOT has the power to impose requirements on the financial institution in the area of management and administration. - Section 84 of FIBA: requires financial institutions to set up various committees and prescribe composition, qualifications and powers and duties of such committees. - BOT regulations and guidelines issued to enhance corporate governance: - BOT Notification No. FPG.11/2561: Regulation on Approving the Appointment of Directors, Managers, Persons with Power of Management or Advisors of Financial Institution. - BOT Notification No. FPG.10/2561: Corporate Governance of Financial Institutions. - BOT Notification No. FPG.8/2561: Regulations on Structure and Scope of Business of Financial Business Groups. - BOT Notification No. FPG.8/2560: Regulations on Risk Supervision of Financial Business Groups. - Financial Institutions Director Handbook. - Listed financial institutions: comply with Notification of the Capital Market Supervisory Board Tor Chor 39/2559 and adhere to the Corporate Governance Code for Listed Companies 2017. - BOT enforcement power: under Section 89 of FIBA the BOT can order removal of any or all directors and senior management for violations or non-compliance. ### Board-level responsibilities and governance requirements - Under BOT Notification on Corporate Governance of Financial Institutions, the Board is responsible for governance policies commensurate with the business profile, systemic importance and organization structure. - Board duties (Section 5.3): - Approve business strategies and risk management policies including setting the risk appetite; responsible for risk governance framework and risk culture; ensure compensation scheme reflects risk policies. - Ensure organization structure promotes checks and balances; three lines of defense must be in place; appoint Risk Oversight Committee and Audit Committee; appoint Nomination Committee, Remuneration Committee and other necessary committees. - Oversee management’s implementation, risk culture and ethics; ensure fit and proper requirements and succession plans for senior management. - Establish guidelines to evaluate senior management’s performance and determine compensation aligned with long-term business sustainability. ### Supervisor assessment of corporate governance (Principle 14 and EC findings) - Corporate governance is key in composite rating and licensing decisions. - BOT supervisory assessments include review of: - Written corporate governance policies covering stakeholders, fairness and integrity, and alignment with business profile and systemic importance. - Board and senior management performance via meeting minutes, attendance and participation; for D-SIBs, supervisors meet with the Board regularly. - Clear prescription of authorities and duties across first, second and third lines of defense by reviewing organizational charts, reporting lines and committee minutes; end-to-end process walk-throughs and interviews. - Remedial actions: BOT requires rectification when operations are not in accordance with governance principles and policies. - Behavioral and culture assessment: BOT implemented B&C assessment forms in a pilot for four large financial institutions, surveying Board and senior management and conducting interviews. ### Board composition, nomination and committee standards (EC3, EC4, EC9) - Composition and nomination: - At least one third of Board members shall be independent directors; chairperson shall be an independent or non-executive director. - At least one Board member shall have educational or professional background in Information Technology (IT). - Board-level committees required: - Audit Committee: at least 3 members, all independent directors; chairperson cannot be chairperson of Board, ROC, Remuneration or Nomination Committees. - Risk Oversight Committee (ROC): at least 3 members; revised Notification requires at least half of members to be independent directors, non-executive directors or advisors; chairperson to be independent or non-executive director. Small, non-complex institutions may assign other oversight-level committees if effective. Compliance deadline: by or before May 2019. - Remuneration Committee and Nomination Committee: at least 3 members, all non-executive directors; chairperson should be an independent director. - Nomination Committee responsibilities: formulate selection policies, develop Board skill matrix, select and nominate qualified candidates. - EC4 suitability and duties: - Board members and senior management must meet suitability standards in honesty, integrity and reputation; competence, capability and experience; and financial soundness as per Sections 24 (1)–(9) of FIBA and BOT notifications. - Appointment and re-appointment of directors, managers, persons with power of management or advisors must be approved by the BOT and are subject to BOT screening. - Board members required to attend at least 75 percent of annual board meetings unless valid reasons exist. - Self-evaluation and cross-evaluation or third-party evaluation to be conducted at least on an annual basis. - EC9 supervisor power: - BOT can require changes in Board composition and can order removal of directors and senior management under Section 89 of FIBA. - BOT supervisors assess composition and performance; request adjustments where composition is inappropriate (e.g., number of independent directors or diversity of expertise). ### Fit and proper standards, appointments and legacy provisions - Fit and proper criteria: honesty, integrity, reputation; competence and experience; financial soundness. - BOT screening for criminal records and inappropriate qualifications prior to approval of appointments. - Transitional and grandfathering provisions (subject to phased enforcement): - The 9-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. Seventy four percent of directors of locally incorporated banks were already in compliance at the assessment date. - Clause 5.2.3 covers the 9-year director renewal period and the 2-year waiting period after discharge from certain roles before appointment as independent director. - Clause 5.2.4 (2) limits the number of appointments as director of companies listed on domestic and overseas stock exchanges to 5 for directors, managers, persons with power of management and advisors. All directors were already in compliance with this requirement. - Requirement for ROC under Clause 5.4.2 comes into effect on May 1, 2019. As of the assessment date, 5 out of 15 domestic banks had set up a ROC; two banks would establish one by December 2018; remaining 8 banks to be in full compliance by May 2019. - The 2-year waiting period for appointment as independent director after discharge from prior roles is noted as being at the shorter end of the spectrum. ### Remuneration, incentives and risk alignment (EC7) - Board/Remuneration Committee responsibilities: - Establish clear compensation policies for directors, senior management and staff aligned with long-term financial soundness and risk governance. - Compensation must not be mainly based on short-term profits and should avoid incentives for excessive risk-taking. - Permissible compensation tools: deferred variable pay, malus and equity-linked deferred bonus to reflect long-term roles, responsibilities and risk outcomes. - Supervisory assessment: - Review compensation policy alignment with business and risk strategy, risk tolerance, objectives, values and long-term interests. - Ensure policies do not create incentives for excessive risk-taking and are sensitive to time horizon of risks. - Review KPIs, weighting factors, evaluation guidelines, and public disclosures on compensation. ### Risk governance, risk management and internal controls (Principle 15 and EC1–EC13) - Board-level risk governance expectations: - Approve and oversee risk governance framework, risk appetite, risk management policies and strategies, and risk culture (BOT Notification No. FPG. 10/2561). - Ensure recognition of model limitations and uncertainties and that risk limits are consistent with capital and liquidity. - Risk management policies and processes: - Required to cover all material risk types: credit, liquidity, market, operational, reputational, strategic, IT risk. - Policies and strategies must be comprehensive, written, Board-approved, reviewed at least once a year or when significant change occurs, and communicated across the organization. - Onsite examinations include document review, walk-through tests, transaction testing and interviews; BOT instructs corrections where concerns arise. - Specific risk and operational standards (EC11): - Credit risk: BOT Policy Statement on Credit Transaction and Credit Risk Examination Procedures Manual; segregation of duties in credit granting. - Market risk: BOT Notification No. FPG. 16/2558 (derivatives) and BOT Notification No. FPG. 94/2551 (market risk supervision and capital requirements). - Liquidity risk: BOT Policy Guidelines on Liquidity Risk Management; BOT Notification No. FPG. 9/2558 (LCR); BOT Notification No. FPG. 1/2561 (NSFR). - Interest rate risk in the banking book: BOT Notification No. FPG. 42/2551. - Operational risk: BOT Policy Statement on Operational Risk Management; ORM unit reporting to RMC. - IT risk: IT Best Practices Phases 1 and 2; BOT Notification on Supervision of Information Technology Risk. - Model governance (EC6): - Models must comply with BOT minimum requirements; boards and senior management must understand limitations; independent validation and testing required. - BOT model specialist team assesses models and parameters used for regulatory capital calculation, provisioning, stress testing and other internal models. - Information systems (EC7): - Information systems must be accurate, complete and timely; cover exposures across products, locations, risk types and counterparties; reports to Board and senior management must be appropriate and timely. - New products and initiatives (EC8): - Policies require Board approval for major activities, new products and material modifications; dedicated committee and end-to-end processes required; monitoring and control systems required. - Risk management function and CRO (EC9–EC10): - Independent risk management function with sufficient resources, authority and reporting access to Board required; subject to regular internal audit review. - CRO appointment, change and removal to be approved by Board; BOT to be informed of changes; public disclosure of organization chart including head of risk management required. - Capital and liquidity adequacy processes (EC5, EC12, EC13): - Financial institutions required to have ICAAP and internal liquidity adequacy assessment processes; submit ICAAP annually. - Contingency arrangements: BCP, capital plan & contingency plan, CFP; recovery plan requirement under BOT Notification No. FPG. 16/2561; BOT assesses adequacy and feasibility with SRU and other authorities. - Stress testing: forward-looking programs commensurate with risk profile; Board approval required; stress test results to be integrated into decision-making, contingency planning and capital/liquidity assessments; BOT conducts annual supervisory stress tests. - Pricing and performance (EC14): - Banks must account for risks in internal pricing, performance measurement and new product approval (examples: FTP, RAROC); BOT supervisors review models, KPIs and new product processes. ### Supervisory practice, assessments and recommendations - BOT supervisory methods: - Document review, internal report reviews, minutes of Board and committee meetings, interviews, walk-throughs, transaction testing, onsite examinations and model specialist assessments. - Remedial powers include requiring corrective actions and adjustments to Board composition or governance arrangements. - Assessment outcomes: - Principle 14: Assessment — Compliant. Comments: corpus of regulations, guidelines and supervisory manual comprehensive and enforceable; governance enhancements in June 2018 (solo) and May 2019 (FBG consolidated). - Principle 15: Assessment — Compliant. Comments: BOT supervisors assess policies and practices in sufficient depth and scope across risk categories. - Recommendations by assessors: - Incorporate regular meetings with independent directors into supervisory process to raise awareness of governance and risk culture. - BOT to better articulate supervisory expectations by publishing best practice guides after thematic reviews or when a range of practice is observed (e.g., risk management and governance). ### Key numeric and timeline facts preserved from source - Board members required to attend at least 75 percent of annual board meetings. - Compliance and transitional dates: - Requirement for ROC effective: May 1, 2019. - 9-year renewal requirement for independent directors effective: May 1, 2022. - Grandfathering of independent directors appointed before Clause 5.2.3 until May 1, 2022. - Quantitative committee and composition requirements: - Audit Committee: comprises at least 3 members, all independent directors. - ROC: comprises at least 3 members; revised Notification requires at least half of members be independent directors/non-executive/advisors. - Remuneration and Nomination Committees: comprise at least 3 members, all non-executive directors. - Transitional compliance snapshot: - 5 out of 15 domestic banks had set up a risk oversight committee as of the assessment date. - Two banks planned to establish ROC by December 2018. - Remaining 8 banks to be in full compliance by May 2019. - Limits and waiting periods: - 9-year director renewal requirement. - 2-year waiting period after discharge before appointment as independent director. - Limit on number of appointments to 5 for directors, managers, persons with power of management and advisors on listed companies. - Pilot programs and samples: - Behavior & Culture (B&C) assessment pilot: 4 large financial institutions. - Compliance percentage: - Seventy four percent of directors of locally incorporated banks in compliance with certain independence requirements at the assessment date. *Source: 1thaea2019004 - Section 41 Clause 3 (3) of FIBA prescribes that where it is necessary for the stability of a — IMF PDF content unit provided.* ### Section 29 - 32 of FIBA empowers the BOT to require banks (both locally incorporated ### 1thaea2019004 - Section 29 - 32 of FIBA empowers the BOT to require banks (both locally incorporated banks and foreign bank branches) to maintain capital ### Legal authority and regulatory framework - Sections 29 - 32 of FIBA empower the BOT to require banks (both locally incorporated banks and foreign bank branches) to maintain capital. - Sections 94-97 of FIBA give the BOT power to order banks to submit a recapitalization plan, intervene and/or suspend operations if a bank fails to comply with minimum capital requirements or if its capital adequacy ratio falls below a pre-set level. - BOT Notification No. FPG. 12/2555 and BOT Notification No. FPG. 9/2561 set Regulations on Supervision of Capital for Commercial Banks and Capital Supervision for Financial Business Groups. - BOT Notification No. FPG. 8/2558 prescribes amounts, types, procedures and conditions for funds from parent companies for foreign bank branches; these assets are treated as capital for foreign bank branches. - BOT Notification No. FPG. 7/2558 prescribes capital components for locally incorporated banks in line with Basel III. ### Minimum capital ratios and buffers - In line with Basel III, the BOT requires locally incorporated banks to maintain: - Common Equity Tier 1 (CET1) of at least 4.5 percent. - Tier 1 capital of at least 6 percent. - Total capital of at least 8.5 percent of risk-weighted assets at the end of the day both on a solo and consolidated basis. - Foreign banks’ branches are required to maintain total capital as a ratio of risk-weighted assets at 8.5 percent. - Banks are required to hold two types of capital buffer under BOT Notification No. FPG. 12/2555: - Conservation buffer: Currently, banks are required to hold a conservation buffer of 2.5 percent. - Countercyclical buffer: Currently, banks are not required to hold a countercyclical buffer; the BOT may require it in the future as deemed necessary. - Domestic systemically important banks (D-SIBs) are required to hold higher loss absorbency (HLA) of 1 percent, subject to a 2-year phase-in arrangement starting at 0.5 percent in 2019 and 1 percent in 2020. Five D-SIBs have been identified. ### Capital composition and eligibility criteria - CET1 primarily comprises common shares and retained earnings. - Equity instruments included in CET1 must meet criteria including a perpetual nature; instruments cannot be repaid outside of liquidation (except buy-back of shares with prior BOT approval). - AT1 instruments’ principal is required to be perpetual; no step-ups or other incentives to redeem. - Inclusion of eligible financial instruments as capital and redemption of capital instruments require prior approval by the BOT. ### Monitoring, measurement and prudential adjustments - BOT regularly monitors capital adequacy using monthly data reported through the Data Management System (DMS), focusing on components of capital, risk weighted assets and capital ratios; data are used for benchmarking at least on a quarterly basis. - BOT has developed early warning indicators (EWI) to identify plausible triggers of risk accumulation that could impact banks’ capital adequacy. - BOT implemented prudential filters to address: - Changes in fair value measurement of derivatives transactions used for hedging cash flow risk. - Accumulated gains or losses from changes in the banks' own credit worthiness. - Accumulated gains or losses from the alternative approach in accounting of the fair value option. - During onsite examinations, BOT supervisors review and verify capital calculation and assess capital planning processes and strategies both in the short-run and long-run. ### Capital adequacy outcomes and leverage monitoring - The Thai banking system capitalization (most recent figures reported in the source): - Total capital ratio for D-SIBs: 17.57 percent. - Total capital ratio for non-D-SIBs: 19.64 percent. - Total capital ratio for foreign bank branches: 20.57 percent. - BOT monitors leverage ratio quarterly; leverage ratios have been monitored since 2014 and are all well above the minimum threshold of 3 percent. The leverage of the Thai banking sector stood well above the minimum threshold at the end of 2017. ### Risk coverage, calculation methods and timelines for standards - Pillar 1 capital requirement covers credit risk, market risk and operational risk from all on- and off-balance sheet items. - Risk-weighted asset calculation methods and related BOT notifications: - Credit risk (standardized approach): BOT Notification No. FPG.15/2555 (credit risk-SA). - Credit risk (IRB): BOT Notification No. FPG.16/2555 (credit risk-IRB). - Counterparty credit risk for derivative transactions: BOT Notification No. FPG.17/2555. - Failed Trades and Non-DvP transactions: BOT Notification No. FPG.18/2555. - Market risk: BOT Notification No. FPG. 94/2551. - Operational risk (BIA and SA): BOT Notification No. FPG.95/2551. - Operational risk (AMA): BOT Notification No. FPG.55/2555. - Implementation timelines and standards: - New market risk framework under Basel III will be implemented in 2022. - Capital charge for Credit Valuation Adjustment risk and capital requirement for exposures to CCP will be in effect in 2021. - New standardized approach to calculate counterparty credit risk exposure (SA-CCR) will be implemented in 2024. - Current counterparty credit risk calculation is in accordance with BOT Notification No. FPG. 17/2555, using the current exposure method (CEM) under Basel II; BOT views CEM as effective given current derivative activities. ### Pillar 2, ICAAP and supervisory actions - Section 30 of FIBA gives the BOT power to require banks to maintain additional capital beyond Pillar 1 as necessary. - Banks are required to establish Internal Capital Adequacy Assessment Process (ICAAP) to cover all significant risks, including Pillar 2 risks: concentration risk, interest rate risk in the banking book, liquidity risk, and strategic risk (BOT Notification No. SVG 5/2552). - All banks must submit their annual ICAAP report no later than Q1 of each year; BOT reviews and evaluates ICAAP against the bank’s nature, size and complexity. - If ICAAP is inadequate, BOT may: - Require mitigation of risk exposures. - Require maintenance of capital higher than minimum capital requirements. - Require submission of a recapitalization plan. - Issue corrective orders and follow up as part of ongoing supervision. - Banks must perform internal stress testing at least annually (normal and crisis conditions) and use results in capital adequacy assessment and capital planning; scenarios should be forward-looking and regularly reviewed. - Locally-incorporated banks are required to perform supervisory stress testing (macro variables and scenarios set by the BOT) once a year covering at minimum credit risk, market risk and liquidity risk; banks must submit Board-approved stress test results to the BOT. - Banks must develop a three-year capital plan under normal circumstances, taking into account stress test impacts and specifying capital increase and contingency plans. ### Limits and supervisory powers over exposures - BOT may impose limits on material risk exposures (Section 30 of FIBA); both on-balance sheet and off-balance sheet risks are included. - Example: BOT imposes net FX position limits on individual currency and aggregate basis as stipulated by BOT Notification No. FPG. 74/2551: Regulations on Foreign Exchange Positions for Commercial Banks (excluding Retail Banks). ### Use and supervision of internal models (EC5) - Use of internal risk assessments to calculate regulatory capital requires prior BOT approval. - BOT has a Risk Assessment and Modelling Department with 11 staff responsible for assessing banks’ internal risk models per BOT Notification No. FPG. 16/2555 and BOT Notification No. FPG. 94/2551. - Current internal-model usage: - Three locally-incorporated banks adopt the Internal rating-based (IRB) approach. - Three foreign bank branches use internal model approach for market risk. - Approval prerequisites and validation focus for internal models include rollout plans, integrated capital calculation systems, model development and validation policies, skilled staff, data reliability, model design, independent validation, back testing and consistency/reliability of volatility and correlation data. - Banks seeking to modify internal rating systems or models must consult BOT; depending on modification scale, BOT may conduct onsite validation before approval. - BOT applies conservatism and data sufficiency requirements; BOT has power to revoke internal model approval (has done so once in the past). ### Supervisor powers for forward-looking capital management (EC6) - BOT can require banks to adopt forward-looking capital management, including stress testing and contingency arrangements. - BOT supervisors review ICAAP and stress test results; if deemed inappropriate or insufficient, BOT can instruct risk management improvements within a reasonable timeframe or require banks to maintain capital above minimum requirements. *Source: 1thaea2019004 - Section 29 - 32 of FIBA empowers the BOT to require banks (both locally incorporated banks and foreign bank branches) to maintain capital.* ### Section 57 of FIBA authorizes the BOT to supervise and examine financial institutions, their ### 1thaea2019004 - Section 57 of FIBA authorizes the BOT to supervise and examine financial institutions, their ### Supervisory authority, scope, and consolidation - Section 57 of FIBA authorizes the BOT to supervise and examine financial institutions, their parent company, subsidiaries and affiliates as if they are the same legal person in accordance with the rules and regulations prescribed in the BOT notifications unless the law regulating the business of these companies already prescribes specific rules and regulations. - The BOT has the power to prescribe the ratio of capital funds or equity of a financial business group in proportion to its assets, liabilities, contingent liabilities or variables and any other risks, or to prescribe other ratios for financial business group of financial institutions. - BOT Notification No. FPG. 9/2561 requires that the banking groups (both solo consolidation and full consolidation) have sufficient capital consistent with the exposures of the group companies. - Insurance companies not included in consolidated financial statements are subject to threshold deduction and the supervision of the OIC. - Currently, the BOT does not specify a capital ratio for each affiliate within the banking group. Entities with significant exposures are those under supervision of the BOT or other Thai regulators (the SEC and the OIC), which require capital based on risk exposures. - Affiliate entities that engage in credit-granting business or similar-to-credit-granting business are under BOT solo consolidation supervision and required to comply with asset classification and provisioning, credit risk management of loan portfolios, etc., to ensure adequate capital allocation within the group. ### Capital adequacy, ICAAP, and Pillar 2 - Assessment: Compliant. - Findings: - Assessors reviewed BOT regulations for compliance with the Basel standards and an ICAAP and the BOT assessment of the ICAAP; concluded BOT’s assessment and analysis was thorough and consistent. - BOT sets prudent and appropriate capital adequacy requirements for banks that reflect the risks undertaken by banks in the market in which it operated. - Components of capital absorb losses and the capital requirements are not less than the Basel standards. - Recommendation: - Assessors recommend the 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. ### Credit risk framework (Principle 17) — overview - Principle 17: supervisor determines that banks have an adequate credit risk management process covering risk appetite, risk profile, and market and macroeconomic conditions across the full credit lifecycle (underwriting, evaluation, ongoing management). - Relevant BOT instruments: - BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions (Boards to approve risk governance framework including risk appetite). - BOT Policy Statement on Credit Transaction; BOT Policy Statement on Credit Reviews; Supervisory Manual on Credit Risk. - BOT Notification No. SVG. 5/2552: stress testing guidance (see EC8). ### EC1 — Bank-wide credit risk management processes - Requirements for banks: - Develop a comprehensive bank-wide credit risk strategy, policy and process commensurate with risk profile, scale, sophistication, capital adequacy, and anticipated external changes. - Policies to address exposure types, economic sectors, geographical locations, currencies, maturities; Board approval and at least annual review. - Prudent credit risk management processes and well-defined credit granting criteria, including authorization levels and credit limits (overall and individual borrowers & counterparties). - Systems for ongoing administration, measurement, monitoring and reporting of credit portfolios and potential problem credits. - Independent and ongoing credit review communicated to Board and senior management; internal controls and three lines of defense. - Supervisory actions: - BOT supervisors check policies, Board/senior management oversight, internal controls, and end-to-end credit processes; conduct transaction testing, interviews, walkthroughs; issue corrective orders when deficiencies observed. ### EC2 — Board and senior management oversight - BOT supervisors verify: - Board approves and regularly reviews credit risk management strategy and significant policies/processes consistent with risk appetite. - Senior management establishes and implements the strategy, communicates it, and oversees day-to-day compliance. - Assessment includes review of Board/committee minutes, documentation, interviews, sample credit files, internal reporting and processes (credit approval, rating, disbursement, review, monitoring, limits). ### EC3 — Credit risk environment, underwriting, administration, and models - Supervisor requires and assesses that banks have: - Well-documented strategy and sound policies without undue reliance on external assessments. - Defined criteria and processes for approving, renewing, refinancing exposures; clear approval authorities. - Effective credit administration including borrower ability/willingness to repay, collateral monitoring, asset grading/classification. - Effective information systems for identification, aggregation and reporting to Board and senior management. - Prudent credit limits consistent with risk appetite and capital strength. - Exception tracking/escalation processes and effective controls around models (validation, governance, segregation of duties). - Supervisory methods: document reviews, walkthroughs, transaction testing, interviews, model governance assessments; corrective orders if not observed. ### EC4 — Monitoring total indebtedness and risk factors - BOT supervisors determine banks maintain policies, processes, and information systems to aggregate exposures (on- and off-balance sheet) including connected persons across branches/subsidiaries. - Banks must track risk factors affecting borrowers (financial status, sector conditions, contingent liabilities, NCB data, exchange rate risk, transfer risk). - Supervisory checks: internal reports, interviews, walkthroughs, transaction testing; issuance of corrective orders if concerns. ### EC5 — Arm’s length credit decisions and conflicts of interest - Legal constraints: - Under FIBA, banks are not allowed to grant credits to their directors or senior management except welfare lending (Section 48). - Banks may grant credits to a major shareholder or to business with related interest up to 5 percent of any type of its capital funds or 25 percent of the total liabilities, whichever is the lesser (Section 49). Such exposures must be arm’s length and Board-approved; conflicted directors must not vote. - Supervisory practice: BOT checks policies and approval processes for related entities and conducts transaction testing; observes conflict-of-interest procedures (reference to CP20). ### EC6 — Board/Senior management approval of major exposures - Supervisor requires credit policy to delegate approval authorities appropriate to bank size, complexity, and risk appetite. - Large exposures or especially risky transactions must be approved by Board, designated committee, or senior management. - BOT assessment includes interviews, committee minutes, exception reports, transaction testing; corrective orders if delegation not observed. ### EC7 — Supervisor access to credit/investment information and personnel - BOT has full access under Section 71 and 85 of FIBA to credit and investment portfolio information and to bank officers via regular reporting, additional requests, and onsite exams. - Regular submissions via Data Management System (DMS) include portfolio overview, individual transactions, classification, provisioning; BOT may request internal management reports and sample credit files during onsite. ### EC8 — Inclusion of credit risk in stress testing - Banks required to conduct periodic stress tests under self-developed scenarios at least annually (BOT Notification No. SVG. 5/2552). - BOT supervisory assessment ensures: - Board and senior management involvement in stress testing policy, implementation, reporting, contingency planning. - Scenarios/assumptions suitable to bank characteristics and economic situations. - Coverage of loan, investment and off-balance sheet credit risk exposures. - Stress testing results used to determine adequacy of provisions and capital; contingency plans for shortages. - BOT also requires banks to conduct stress testing under BOT supervisory scenarios annually for supervisory analysis. ### Assessment of Principle 17 - Assessment: Compliant. - Comment: Assessors reviewed inspection reports, orders and recommendations; follow-up procedures; concluded supervisory inspections and follow-ups are adequate. ### Problem assets, provisioning and reserves (Principle 18) — overview - Principle 18: supervisor determines banks have adequate policies/processes for early identification and management of problem assets and for maintaining adequate provisions and reserves. - Relevant BOT instruments: - BOT Notification No. FPG. 5/2559 Re: Assets Classification and Provisioning. - BOT Policy Statement on Credit Reviews; BOT Supervisory Manual on Credit Risk. - Section 80(2) of FIBA and BOT Notification No. FPG. 22/2552 on foreclosed properties. ### EC1 — Policies/processes for problem assets and review frequency - Requirements: - Banks must have policies on asset classification, provisioning and write-off approved by the Board. - Banks required to review credit exposures at least annually; proportion reviewed depends on BOT credit risk rating. - Foreclosed properties must be disposed within 5 years unless approved by BOT; additional provision of 20–70 percent of foreclosed property value if such properties exceed 10 percent of total capital funds. - Since 2011, banks required to maintain additional provisions for current loans (CL) and possible impaired loans (PIL) to cover expected credit loss (PD x LGD x EAD) and review CL/PIL monthly. Banks may use internal PD and LGD subject to BOT model approval; otherwise use BOT prescribed rates. - Supervisory practice: - BOT reviews policies/processes, conducts walkthroughs, interviews, transaction testing, and assesses independence/effectiveness of credit review functions; issues corrective instructions where needed. ### EC2 — Grading, classification, and provisioning methodologies - BOT requires policies covering roles/responsibilities, quantitative/qualitative factors, assumptions/methodologies for provisions, write-offs and recovery, internal controls and monitoring. - Asset classes: six classes — pass, special mentioned, substandard, doubtful, doubtful of loss, loss — based on days past due and qualitative factors. - Provisioning rules: - Pass and special mention: provision at least 1 percent and 2 percent respectively of outstanding after deducting eligible collateral or using collective approach. - Nonperforming (substandard, doubtful, doubtful of loss): specific provision for difference between outstanding and present value of expected cash flows or expected proceeds from collateral. - Retail portfolios with homogeneous characteristics may use collective approach based on historical loss experience. - Banks must write off irrecoverable assets (including assets classified as loss). - Supervisory review includes external auditor engagement and remedial instructions where provisioning is inadequate. ### EC3 — Off-balance sheet exposures included in provisioning - BOT requires provisions for off-balance sheet exposures in the same way as on-balance sheet exposures (BOT Notification No. FPG. 5/2559). - Supervisory checks include document reviews and transaction testing; corrective instructions if deficiencies found. ### EC4 — Timeliness and realism of provisioning and write-offs - BOT supervisors assess timeliness of provisioning/write-off and that inputs/assumptions reflect expected credit loss considering market and macroeconomic conditions. - Banks must maintain enough provision at least in accordance with BOT regulations plus additional CL/PIL provision; provisions subject to periodic independent validation. - Supervisory tools: documentation review, model assessment, onsite transaction testing; BOT instructs banks to increase provisions if inadequate. ### EC5 — Early identification, resources, and circumvention testing - Supervisor checks that banks: - Consider quantitative and qualitative factors in identifying deteriorating assets. - Have reliable risk grading tools. - Have adequate policies/systems for timely identification, oversight, rescheduling/restructuring, and collection. - Allocate sufficient resources and perform independent credit reviews. - BOT tests for material circumvention of classification/provisioning (rescheduling, refinancing, reclassification) via document review and credit file sampling. ### EC6 — Supervisor access to classification and provisioning documentation - BOT has full access under Section 71 and 85 of FIBA and BOT Notification No. FPG. 5/2559 to loan-by-loan and aggregate classification/provision information via DMS and may request additional documentation; compares classifications across banks and may require adjustments. ### EC7 — Prudential adequacy of classifications and provisioning - BOT continuously assesses accuracy of asset classifications and adequacy of provisions taking into account economic/industry analyses. - Supervisory measures include random sampling of credit files and requiring banks to adjust classifications/increase provisions or impose remedial measures. ### EC8 — Valuation and enforceability of risk mitigants - BOT requires policies and mechanisms for regular assessment and legal enforceability of guarantees, credit derivatives and collateral; collateral valuation must reflect net realizable value and follow valuation standards (Thai Valuers Association, Valuers Association of Thailand, SEC). - Collateral appraisal by qualified external/independent appraisers required except for low credit exposures. - Supervisory checks include methodology reviews, independence of valuation units, approval by valuation acceptance committees, benchmarking against public property price data, and ensuring use of risk mitigants in provision calculations complies with regulations. ### EC9 — Criteria for problem asset identification and reclassification - BOT requires classification into six classes; loans with significant doubt (e.g., payment in arrears of more than 3 months or weak borrower financials) shall be classified as NPLs. - BOT monitors CL/PIL portfolios (watch list, rescheduled, restructured, special mentioned loans) via offsite and onsite supervision. ### EC10 — Board reporting on asset portfolio condition - Banks must ensure Board receives timely information on asset portfolio condition, classification, provisions, and major problem assets; credit review processes and annual credit plans must be Board-approved. - Supervisory checks: review of internal reports, committee minutes, interviews, and walkthroughs to confirm adequate reporting and Board engagement. ### EC11 — Individual assessment for significant exposures - BOT requires loan-by-loan valuation/classification/provisioning for non-homogeneous portfolios; collective approaches allowed for homogeneous retail portfolios with Board-approved assumptions/methodologies. - Supervisory review includes document review, credit file sampling, collateral appraisals, and model validation. ### EC12 — System-wide trends, concentrations, and provisioning adequacy - BOT receives monthly portfolio data and additional information to assess concentration risk (sector, geography, currency) and system-level vulnerabilities. - Supervisory practices: - Continuous monitoring of top 100 large groups of connected borrowers and top 100 large single borrowers of each bank. - BOT requires banks to conduct stress tests under BOT supervisory scenarios and uses results to estimate impact on asset quality, capital adequacy and provisions. - Thematic examinations on sectors (e.g., real estate lending, hire purchase, unsecured lending). - Follow-up with banks to ensure adequate risk mitigation if provision insufficiencies or deteriorating trends are identified. ### Assessment of Principle 18 and assessors’ findings - Assessment: Largely compliant. - Findings and statistics: - Provision coverage stands at 140 percent (total provisions/total NPLs) and 170 percent (total provisions/required provisions). - Assessors’ recommended revisions to align with Basel April 2017 guidance (“Prudential Treatment of Problem Assets—Definitions of Non-performing 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. - BOT definition of restructuring and rescheduling should align with forbearance definition in international good practice (refer to borrower financial difficulty, not conditional on bank making a loss). - Probation period for nonperforming restructured exposures to be upgraded to performing is currently three months; international good practice requires a minimum of one year. - No upgrade of the exposure should take place when restructuring is granted; upgrades should only be allowed after successful completion of the probation period. - More detailed guidance in the BOT regulation on the level of application (borrower or transaction level) of the classification; Q&A exists but assessors recommend inclusion in regulation. - BOT response and transition: - 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: three classes (performing, under-performing, nonperforming); performing: provision for expected credit loss over 12-month period; under-performing and nonperforming: provision over the expected life. Revised regulation not in force at assessment time but likely to address most recommendations. ### Concentration risk and large exposures (Principle 19) — overview and EC1–EC4 highlights - Principle 19: supervisors ensure banks identify, measure, evaluate, monitor, report and control concentrations and set prudential large exposure limits. EC1 — Bank-wide concentration policies and regulatory limits - BOT Notification No. FPG. 10/2561 requires policies/processes covering concentration risks (on- and off-balance sheet). - BOT Notification No. SVG. 5/2552 requires banks to assess concentration risk quantitatively (large borrower and sector) and remediate within no longer than 12 months if limits exceeded. - Legal powers: sections 30, 34, 50, 57, 71, 84, 85 of FIBA empower BOT to prescribe regulations on concentration risk and instruct remedial actions. - Specific regulatory limits: - Single counterparty limit: under BOT Notification No. FPG. 22/2555 and BOT Notification No. FPG. 8/2560, aggregate exposure to a single counterparty or several persons for same project/objective shall not exceed 25 percent of banks’ total capital funds; group of connected borrowers included. - Investment limits (BOT Notification No. FPG. 7/2561): - Limit of total investments in all shares of all companies: 20 percent of total capital funds of banks. - Limit of investments in shares of any individual company: 5 percent of total capital funds or 10 percent of total paid-up shares of such invested company. - Limit of investments in FinTech business: 3 percent of total capital funds. - Limit of total investments in shares, investment units, trusts of FinTech business: 30 percent of total capital funds. - Foreign exchange position limits (BOT Notification No. FPG. 74/2551): - Individual currency limit: net open position in each currency shall not exceeding 15 percent of their capital fund or USD 5 million, whichever is greater. - Aggregate currency limit: an aggregate foreign currency position shall not exceed 20 percent of their capital funds or USD 10 million, whichever is greater. - Supervisory expectations: policies must define thresholds/limits, Board approval, periodic review, and clear communication. EC2 — Information systems to identify/aggregate concentrations - BOT requires banks maintain information systems to identify, measure, monitor and control concentration risk; supervisors evaluate effectiveness via report reviews, interviews, walkthroughs, and random debtor/related party checks; BOT may order system strengthening. EC3 — Thresholds consistent with risk appetite and reporting - Banks must set thresholds for acceptable concentrations consistent with risk appetite, profile and capital; report material concentrations to Board and senior management regularly; supervisors assess suitability, staff awareness, reporting timeliness and Board engagement. EC4 — Supervisor obtains information to review sectoral, geographic and currency concentrations - BOT receives monthly portfolio data and additional internal reports and committee minutes; supervisors perform continuous review and produce sector analyses (e.g., automobile, real estate, top 100 debtor groups) and scenario tests; top 100 debtor group analysis conducted every semester. *Source: 1thaea2019004 - Section 57 of FIBA authorizes the BOT to supervise and examine financial institutions, their* ### Section 4 and 50 of FIBA and BOT Notification No. FPG. 22/2555 Re: Supervisory Guidelines ### Section 4 and 50 of FIBA and BOT Notification No. FPG. 22/2555 Re: Supervisory Guidelines ### Inclusion of connected persons for single-counterparty exposure - Connected persons to be included when determining credit exposure to a single counterparty: - Closed family members (i.e., spouse and child). - A company of which such person, including their spouse and child, has power of management, power to control the majority of votes in the shareholders meeting, holds 20 percent or more of the company’s share capital, or power to control the appointment or removal of directors. - A subsidiary or affiliate of the company. - A principal or agent. - Other persons having such characteristics as prescribed in the BOT notification. - BOT supervisors review grouping of connected borrowers and randomly review grouping of debtors and related parties; if inaccurate, banks will be ordered to make corrections. ### Large exposure limits, monitoring, and supervisory practice (EC6; AC1) - Statutory limits and definitions: - Banks must not have exposures both on- and off-balance sheets to a single borrower including their connected persons or to any project for the same purpose more than 25 percent of their capital funds on the solo basis and 25 percent of their financial consolidated group’s capital fund on the consolidated basis (BOT Notification No. FPG. 22/2555; BOT Notification No. FPG. 8/2560). - Exposures include all transactions relating to granting credits, investments, undertaking of contingent liabilities, counterparty credit risk exposure, and other credit exposure. - Ten percent or more of a bank’s capital is defined as a large exposure. - Twenty-five percent of a bank’s capital is the limit for an individual large exposure to a private sector nonbank counterparty or a group of connected counterparties. - Supervisory expectations and processes: - Senior management is required to monitor these limits (solo and consolidated) to ensure compliance with laws and that internal risk tolerance is not exceeded (BOT Notification No. FPG 10/2561; BOT Notification No. FPG 8/2560). - BOT supervisors review coverage, timeliness, and frequency of concentration risk reports prepared for the Board and senior management. - Supervisors check that banks have policies and processes to monitor concentration against thresholds and limits and that threshold breaches are timely escalated to senior executives, relevant committees, or Board for appropriate actions. - BOT supervisors assess sector concentration policy and large borrower concentration policy; if concerns arise, the BOT will instruct the bank to reduce the risk exposure or hold additional capital against the exposure. - Temporary exemptions: - Banks can apply for temporary exemptions under exceptional circumstances; BOT can grant exemptions but requires additional capital and a plan to reduce the exposure. - Supervisory assessment outcome: - Assessment of Principle 19: Compliant. The assessors reviewed examination reports, risk assessments, and a Pillar 2 assessment and concluded that the BOT supervisors review concentration risks adequately. ### Stress testing and concentration risk in supervisory review (EC7) - Requirement: - Banks are required to periodically conduct stress tests under self-developed scenarios to assess impact on key risk exposures, including credit concentration and adequacy of provisions and capital, at least annually (BOT Notification No. SVG. 5/2552 Guideline on Supervisory Review of Capital Adequacy (Pillar 2)). - Stress test outcomes shall be used for the banks’ own risk management. - Supervisory evaluation of bank stress testing: - Supervisors evaluate whether: - Banks’ Board and senior management are involved in stress test preparation from policy formulation to execution and contingency planning. - Scenarios and assumptions are reasonable and appropriate to the nature, risk, size and complexity of the business and the economic conditions. - Exposure under stress testing covers all major credit risk transactions such as loan, investment and off-balance sheet. - Stress tests significantly affect banks’ provisioning and capital adequacy; if results require higher provisions and cause capital to fall below minimum requirement, supervisors check for risk mitigation measures and feasible plans. - Supervisory scenarios: - BOT requires banks to perform stress tests under the BOT's supervisory scenarios every year to enable comparison among banks and aggregate system-wide analysis; regulatory scenarios may identify industries affected by prolonged economic slowdown that would affect banks’ loan portfolios concentrated in such industries. ### Definition and supervision of related parties and related transactions (Principle 20; EC1, EC2) - Legal basis and scope: - Sections 4, 48, 49, and 59 of FIBA define related party and empower BOT to issue standards (notifications) on related party transactions. - Related parties include directors, senior management, major shareholders, business with related interest, subsidiaries and affiliates, and related parties of those persons. - Specific definitions preserved from the notifications: - Major shareholder: a person who holds or possesses shares of a bank in excess of five percent of outstanding shares, including shares held by related persons. - Business with related party: a company in which a bank, its directors, persons with power of management, or any related person of those persons hold shares in aggregate of more than ten per cent of the total shares sold of that company. - Subsidiary: (i) a company that has another company as its parent company; or (ii) a subsidiary of the company under (i) of any level along the line. - Parent company refers to a company that has power to control the business of another company whether directly or indirectly in any of the following manners: - holding shares in a company more than fifty percent of its total shares sold; - having power to control the majority of votes in the shareholders meeting of a company; - having power to control the appointment or removal of persons with power of management or at least one-half of all directors of a company; - having power to control business in any other manners pursuant to the rules prescribed in the notification of the BOT. - Holding shares in a company of twenty per cent or more of its total shares sold whether directly or indirectly shall be presumed to have power to control the business unless proven otherwise. - Bank’s affiliate: a subsidiary which has a common parent company. - Related person: a person who is related to another person in any of the following manners: 1. Spouse. 2. A child or adopted child who is under legal age. 3. A company of which such person or the person under (1) or (2) has power of management. 4. A company of which such person or the person under (1) or (2) has power to control the majority of votes in the shareholders meeting. 5. A company of which such person or the person under (1) or (2) has power to control the appointment or removal of directors. 6. A subsidiary of the company under (3), (4) or (5). 7. An affiliate of the company under (3), (4) or (5). 8. A principal, an agent. 9. Other persons having such characteristics as prescribed in the BOT notification. - Where any person directly or indirectly holds shares in any company in the amount of twenty per cent or more of the total shares sold, it shall be presumed that such company is a related person of such person, unless proven otherwise. - Supervisory practices to identify and monitor related parties: - Supervisors assess whether banks have established policies and definitions of related lending consistent with law and BOT regulations and a process for identifying and monitoring related transactions. - Assessments include review of: - Data submitted to the BOT on a regular basis through the DMS such as monthly submission of outstanding loans, investments and contingent liabilities owed by a person or related business with significant relevance. - Information on shareholding, directorship, status as an authorized person or controlling stakes in businesses, and any related person of a director and an authorized person (such as spouse or children). - Meeting minutes/reports of the Board and Credit Committee meeting. - Supervisors evaluate efficiency and effectiveness of processes, working systems and tools via walkthroughs, interviews, and related party transaction testing to assess correctness and completeness of banks’ policy implementation. - Arm’s-length requirement and transaction characteristics to avoid (EC2): - Section 49 of FIBA and BOT Notification No. FPG. 36/2551: Guidelines on Conducting Transactions with Major Shareholders or Businesses with Interest (Related Lending) require that transactions with major shareholders, businesses with related interest, or related persons: - Be undertaken on an arm’s length basis. - Not be given favorable considerations or contain more favourable terms than those with non-related parties. - Transactions shall not have the following characteristics: - Not taking into account the status and operating performance of the business or not taking into account a feasibility analysis of the project. - Offering any special favor to the business, e.g., charging lower interest rate than the rate normally charged on customers with similar risk profile, no mortgage registered on immovable property placed as collateral, no legal enforcement made on the collateral, etc. - There is reasonable doubt that the business is truly conducted. - Banks are required to have policies and processes on conducting transactions with a major shareholder or a business with interests, stipulating that such transactions must be conducted in accordance with the BOT guidelines on credit transactions. *Source: Section 4 and 50 of FIBA and BOT Notification No. FPG. 22/2555 Re: Supervisory Guidelines (excerpts).* ### Section 48 (1) of FIBA prohibits banks from granting credits or credit-like transactions, or ### 1thaea2019004 - Section 48 (1) of FIBA prohibits banks from granting credits or credit-like transactions, or ### Related‑party and intra‑group transactions (EC3–EC7) - Section 48 (1) of FIBA prohibits banks from granting credits or credit-like transactions, or providing guarantees for any of the banks’ directors, senior management (such as managers, deputy managers, assistant managers or persons holding equivalent positions under different titles, authorized persons), or any related person of those persons except the transactions that are part of employees’ benefits. - For transactions with banks’ subsidiaries and affiliates: - The parent company’s Board must approve a policy on intra-group transactions and a policy on risk management for intra-group transactions as well as any change to those policies and submit a letter confirming their policy approval to the BOT at least once a year. - Companies within a financial group must be subject to the approved policies on transactions with intra-group companies and must comply with the same process as applied to transactions with general customers unless approved otherwise. - Legally enforceable agreements must be made with the same terms or conditions as specified for transactions with general customers with the same risk profile (example: intra-group purchase/sale of assets should be made at a market price with the same terms or conditions as with external parties). - Ongoing BOT supervision and review: - BOT supervisors monitor related transactions to ensure they comply with the same process applied to non-related counterparties and are not undertaken on more favorable terms. - Reviews include related policies and processes, internal reports, internal audit/compliance/credit reports, interviews with relevant staff, process walk-throughs, and random examination of credit files to confirm credit approval process (including credit analysis) complied with BOT regulations and banks’ policies. - If improper credit analysis or special interest rates are found, BOT supervisors will ask banks to clarify and order immediate rectification of misconduct. - Governance and approval: - Supervisor requires that transactions with related parties and the write-off of related-party exposures exceeding specified amounts or otherwise posing special risks are subject to prior approval by the bank’s Board. - Board members with conflicts of interest must be excluded from the approval process of granting and managing related party transactions. - Policies and processes on transactions with a major shareholder or a business with interests are approved by the banks’ Board with unanimous resolution. - Under BOT Notification No. FPG. 5/2559: Asset Classification and Provisioning, banks must have clear written policies and internal controls for loan write-offs and ensure loan write-offs are not for benefits of directors, senior management, shareholders, or related parties. Starting from 2020, all write-offs of related party exposures must obtain prior approval from the banks’ Board of directors. - Under BOT Notification No. FPG. 10/2561: Corporate Governance, banks’ board members are required to perform duties with integrity and not participate in decisions relating to transactions or affairs that they or their related parties have shares of interest, directly or indirectly. - Limits on related‑party exposures (EC5): - Under Section 49 of FIBA and BOT Notification No. FPG. 36/2551: Guidelines on Conducting Transactions with Major Shareholders or Businesses with Interests (Related Lending), banks are prohibited from having credit exposures to major shareholders and related businesses exceeding 5 percent of the banks’ total capital or 25 percent of total liabilities of such shareholders and their related businesses, whichever amount is lower. - Credit exposures to related persons of major shareholders shall be treated as transactions with major shareholders. - Supervisors check that banks do not exceed limits and have policies and processes for identifying and monitoring exposures, including escalation when exposures exceed soft/hard thresholds. - Identification, monitoring, reporting, and oversight (EC6–EC7): - Banks must have policies/processes to identify individual and total exposures to related parties and to monitor and report them through an independent credit review or audit process. - Exceptions to policies/processes/limits must be reported to appropriate senior management and, if necessary, to the Board in a timely manner. - Senior management frequently monitors related party transactions; the Board provides oversight. - BOT supervisors review adequacy and effectiveness of banks’ policies/procedures, monitoring/reporting systems, oversight functions (credit review, compliance, internal audit), and may require remediation where deficiencies are found. - BOT receives related party exposure data via the Data Management System (DMS) such as monthly submissions of outstanding loans, investments and contingent liabilities transacted with a person or a related business, classified by debtor. Sections 71 and 85 of FIBA give the BOT authority to ask banks to submit supplemental information (e.g., minutes, internal reports). - Assessment summary: - Assessment of Principle 20: Compliant. - Comment: Except for credit cards, directors, bank management and persons with power of management are not permitted to borrow from the bank. The framework regulating related party lending is comprehensive and compliance closely supervised by the BOT. ### Country and transfer risk (Principle 21, EC1–EC6) - Scope and supervisory expectations (EC1): - Supervisor determines banks have adequate policies/processes to identify, measure, evaluate, monitor, report and control or mitigate country risk and transfer risk in international lending and investment activities, consistent with banks’ risk profile, systemic importance and risk appetite. - Exposures (including intra-group exposures where relevant) are identified, monitored and managed on regional and individual country basis in addition to end-borrower/end-counterparty basis. - Banks required to monitor and evaluate developments in country risk and transfer risk and apply appropriate countermeasures and contingency plans (BOT Policy Statement on Country Risk Management). - Ongoing supervisory review (EC1 continuation): - Supervisors review whether policies/processes address all key country risk components: (i) sovereign risk, (ii) transfer risk, (iii) contagion risk, and (iv) macroeconomic risk, including transfer risk. - Supervisors assess whether policies are commensurate with bank’s risk profile, systemic importance and risk appetite, account for market/macro conditions, and provide bank-wide view of exposures and impacts on provisioning and capital adequacy. - Country risk exposures must include on and off balance sheet items, be identified, measured, aggregated, monitored regularly, and subject to individual country or regional limits and possible additional provisioning. - Supervisors assess adequacy of human resources, processes, systems, risk management, internal controls and senior management oversight; may request more information or supporting measures when country risk significantly changes (example: BREXIT review). - Board approval and oversight (EC2): - Banks’ strategies, policies and processes for country and transfer risk management must be approved and regularly reviewed by the Board (at least once a year or when there is a significant change) and integrated into overall risk management. - Supervisory assessment includes reviewing Board minutes, evidence of communication, compliance/internal audit reports, process walk-throughs, staff interviews and transaction testing. - Information systems, aggregation and limits (EC3): - Banks must have information systems, risk management systems and internal control systems that accurately aggregate, monitor and report country exposures on a timely basis and ensure adherence to established country exposure limits. - Supervisors assess country risk evaluation methods, frequency of country-specific reviews (at least once a year or when significant changes occur), effectiveness of information systems for aggregation/reporting, threshold/limit setting and escalation procedures, and Board/senior management engagement and responsiveness. - Provisioning against country/transfer risk (EC4): - BOT requires banks to maintain policies/processes for appropriate provisions against country and transfer risk, approved by the Board, that include (i) analysis of each country’s problem and severity, and (ii) estimate of loss and provision needed to cover expected loss (BOT Policy Statement on Country Risk Management). - Supervisors review provisioning policies/procedures, accuracy of provisioning calculation and provision levels against BOT guidelines by sampling credit files with country/transfer risk exposures; external auditors also determine accuracy and adequacy of provision per BOT Notification No. FPG. 5/2558. - Stress testing (EC5): - Banks must periodically conduct stress tests in accordance with size and sophistication of exposures in each country to assess impact on country risk exposures, provisioning and capital; stress test results used for risk management and reported to the Board and senior management. - Supervisory evaluation of stress testing includes Board/senior management involvement, reasonableness of scenarios/assumptions, coverage of loan/investment/off-balance sheet items, and use of results to reassess policies, limits, mitigation measures and contingency/support plans if impacts exceed acceptable levels. - Supervisory information and powers (EC6): - BOT receives country/transfer risk information from banks through the Data Management System (DMS) (e.g., loans, obligations, capital separable by country, balance sheet and income statements from overseas branches/subsidiaries). - BOT may require additional information such as committee meeting minutes and internal management/risk reports and monitors country risk for each bank and the banking system on an ongoing basis; important country risk analysis reports are prepared to assess impacts on individual banks and the financial system. - BOT supervisors have the power to request additional information as needed (e.g., in crisis situations). *Source: https://www.imf.org/-/media/files/publications/cr/2019/1thaea2019004.pdf* ### Section 85 of FIBA, should there be issues of concern, for example, performance of top 20 ### Section 85 of FIBA, should there be issues of concern, for example, performance of top 20 foreign borrowers in each country ### Cross-border activities and Principle 21 - Assessment of Principle 21: Compliant. - Cross-border activities, including establishing onsite presence, are increasing. - Examiners conduct onsite reviews of cross-border offices as warranted. - Recommendation: Country risk manual should be enhanced by providing best practices on strategic risk analysis of banks expanding cross-border and linking to corporate customers due diligence that they are serving. - BOT supervisors will follow up with banks to understand root causes and ensure appropriate risk mitigation strategies when issues arise (for example, performance of top 20 foreign borrowers in each country). - In rare situations (example given: Brexit), BOT supervisors may ask for additional information to follow up on impact and discuss preventive measures with the bank’s senior management. ### Principle 22 — Market risk (overview) - The supervisor determines that banks have an adequate market risk management process that takes into account their risk appetite, risk profile, and market and macroeconomic conditions and the risk of a significant deterioration in market liquidity. - Requirement: prudent policies and processes to identify, measure, evaluate, monitor, report and control or mitigate market risks on a timely basis. - BOT Notification No. FPG. 94/2551: Regulations on Market Risk Supervision and Capital Requirements for Market Risk of Financial Institutions sets out requirements on market risk management in terms of effective governance and oversight, and sound market risk measurement and management. ### EC1 — Bank-wide market risk management processes - Requirement: Banks must have appropriate market risk management processes that provide a comprehensive bank-wide view of market risk exposure and be consistent with the risk appetite, risk profile, systemic importance and capital strength of the bank; account for market and macroeconomic conditions and the risk of a significant deterioration in market liquidity; and clearly articulate roles and responsibilities for identification, measuring, monitoring and control of market risk. - Legal/regulatory basis: Notification on Corporate Governance of Financial Institutions; BOT Notification No. FPG. 94/2551. - BOT expectations for internal control system for market risk management include: - (i) Roles and responsibilities of the Board of directors and senior management; - (ii) Risk identification, monitoring, and assessment; - (iii) Risk control and segregation of duties; - (iv) Record keeping and internal communication; and - (v) Internal audit system and corrective action. - Supervisory practice: - Onsite inspections of market risk supported by a dedicated team of market risk specialists. - Evaluations cover senior management oversight, three lines of defense mechanism/role and responsibility, day-to-day operational management, and capital adequacy. - Banks’ trading book and risk appetite must be approved by the Board and reviewed regularly. - Supervisors check clear establishment of responsible units for identifying, measuring, monitoring and controlling market risk. - Ongoing monitoring: BOT monitors banks’ market risk profile from internal management reports/minutes and a predefined set of key risk indicators (market risk dashboard: changes in trading volume, market risk weighted assets, and profitability). ### EC2 — Board approval and oversight of market risk strategies - Requirement: Banks’ strategies, policies and processes for management of market risk must be approved by the Board and overseen to ensure effective implementation and integration into overall risk management. - Supervisory practice: - Review meeting minutes of the Board, senior management, and relevant committees (Risk Management Committee, Audit Committee). - Check that: - (i) Strategies and key policies for market risk management have been approved and are periodically reviewed by the Board; - (ii) The Board and senior management are actively involved and responsible for overseeing market risk management processes to identify, measure, evaluate, monitor and control market risk exposure; - (iii) Assigned committees appropriately and effectively implement the banks’ market risk strategies and policies. - Review operations of departments related to market risk (limit-setting, risk measurement, trading profitability, mark to market process, new product offering) for compliance with Board and senior management policies. ### EC3 — Controlled market risk environment (information systems, limits, exceptions, models, trading book) - Supervisor determines that banks’ policies and processes establish an appropriate and properly controlled market risk environment including: - Effective information systems for accurate and timely identification, aggregation, monitoring and reporting of market risk exposure to the bank’s Board and senior management. - Appropriate market risk limits consistent with the bank’s risk appetite, risk profile and capital strength, and with management’s ability to manage market risk and understood by, and regularly communicated to, relevant staff. - Exception tracking and reporting processes ensuring prompt action at appropriate senior management or Board level. - Effective controls around the use of models to identify and measure market risk, and set limits. - Sound policies and processes for allocation of exposures to the trading book. - Supervisory procedures: - Assess front, middle, and back office consistency via documents, staff interviews, and systems/control review. - (a) Verify management information systems provide reliable, accessible, timely data to identify, aggregate, monitor, issue alerts, and report positions and risk sensitivities; market risk reports must be produced accurately and timely to Board, senior management, and sub-committees. - (b) Review that risk limits are consistent with risk appetite/profile/capacity, are written, communicated, set by a unit independent from risk-taking activities, sufficiently granular, authorized and periodically reviewed by the Board. - (c) Determine existence of processes to monitor limit utilization, exceptions, or limit excesses, including: appropriate monitoring procedures/reports/controls and actions by Board/senior management/committees in case of limit excesses; reporting of reasons, incident reporting, and approval seeking; tracking and auditing of exception activities (limit breaching transactions, off-hour/off-premise/off-market rate transactions). - BOT supervisors determine whether banks issued clear written guidelines/policies to staff on unusual deals, approval, reporting and monitoring process; unusual and non-delegated transactions must be reported to authorized persons for approval. - (d) Review internal models: assumptions and methodologies should be grounded by academic theory and industry practice; models must capture all material risks; validation including back testing; independent validation at least once a year and re-calibration when necessary. - (e) Review trading book policy: holding periods, criteria for assigning instruments to trading book, and guidelines for transfers between trading and banking books. BOT randomly checks justification for transfers between books and reporting of such transfers to senior management. - BOT Notification No. FPG. 94/2551 sets expectations on sound policies/processes for allocation to the trading book and appropriate market risk limits. ### EC4 — Valuation practices and controls - Supervisor determines banks’ marked-to-market positions are revalued frequently; all transactions captured timely; valuation uses consistent and prudent practices and reliable market data verified by a function independent of relevant risk-taking business units; where market prices unavailable, internal or industry-accepted models used; model validations by independent functions required. - BOT requirements: - Banks must establish an appropriate valuation system able to revalue trading book positions daily through mark-to-market or mark-to-model methods (BOT Notification No. FPG. 94/2551). - Supervisory practice: - Assess fair valuation policies/processes approved by appropriate committees; review valuation methods and systems for independence, accuracy, timeliness. - Expectation: marked-to-market positions revalued daily at observable market prices from reliable and independent sources (Reuter and Bloomberg). - For mark-to-model pricing: models developed and validated by units independent of risk-taking units; models reviewed at least once a year; supervisors assess appropriateness of assumptions, parameters, and comparison of actual closing values to model outputs. - Banks must notify senior management or assigned sub-committee of model weaknesses and how to reflect those in valuation outputs. - Banks required to have fair valuation adjustment policy for instruments revalued by mark-to-model and illiquid products, considering complexity of portfolios and implementation. - Where mark-to-market not possible, banks must set governance and control processes for instruments measured at fair value, including model development processes, independent initial validation and approval, verification of inputs/methodology/software/outputs, periodic review/validation at least annually, and policies for valuation adjustments/reserves for uncertainty (illiquid positions, concentrated positions, model risk). ### EC5 — Capital against unexpected losses and valuation uncertainty - Supervisor determines banks hold appropriate levels of capital against unexpected losses and make appropriate valuation adjustments for uncertainties in determining fair value of assets and liabilities. - BOT requirements: - Banks to maintain capital against market risks (foreign exchange, interest rate, equity, and commodity risks) if trading book positions meet the specified threshold.67 - Banks with trading book positions below the threshold are required to maintain capital against only commodity risk and market risk for credit derivatives. - BOT may require banks with trading book positions below the threshold to maintain capital for all risk factors or any risk factor in addition to commodity risk and market risk for credit derivatives if necessary to enhance banks’ stability. - Supervisory practice: - Monitor actual Value at Risk (unexpected loss) versus VaR limit, market risk capital charge, and banks’ predefined preventive actions to mitigate risk. - Verify accuracy of unexpected loss and market risk weighted asset calculations by randomly reviewing certain significant transactions, complex products, and new transaction types to ensure accurate measurement and appropriate capital. - As part of ICAAP review, supervisors assess banks’ assumptions, methodologies, scenarios, measures and other relevant details in ICAAP reports to ensure appropriate risk calculation methodology and adequate capital against all major types of risks, including market risk, in normal, uncertain, and stressed conditions. - Footnote 67 — Threshold level: - 1( Amount of baht-equivalent trading book positions of all currencies averaged over the last 6 months of 3,000 million baht and above or - 2( Proportion of the amount of baht-equivalent trading book positions to the sum of baht-equivalent of total assets, total liabilities, and total derivative transactions in all currencies, averaged over the last 6 months of 5% and above. ### EC6 — Stress testing and inclusion of market risk exposures - Supervisor requires banks to include market risk exposure into stress testing programs for risk management purposes. - BOT expectations: - As part of ICAAP, banks required to conduct stress tests under both supervisory scenarios once a year and self-developed scenarios that should cover market risk exposures on a quarterly basis. - Stress testing/scenario analysis should be part of risk management to effectively manage risks and assess market risk that may adversely affect banks’ goals. - Stress test results must be routinely reported to and periodically reviewed by the Board and senior management and incorporated in risk monitoring, management and control, and review processes. - Supervisory review: - Verify banks regularly conduct market risk stress tests for internal risk monitoring. - Self-developed scenarios (ICAAP): banks use own scenarios set in accordance with risk appetite, trading policy, risk management policy, and short term to long term capital projection; banks shall conduct stress test on market risk exposures and incorporate stress test results in three years capital planning. - Where stress test results reveal vulnerability, BOT supervisors require banks to take prompt actions (reducing exposures or increasing capital). *Source: 1thaea2019004 - Section 85 of FIBA, should there be issues of concern, for example, performance of top 20 foreign borrowers in each country* ### 2. Supervisory stress scenarios: for trading book and available for sale (AFS) positions, the ### 2. Supervisory stress scenarios: for trading book and available for sale (AFS) positions, the ### Market risk and supervisory stress testing (Principle 22) - Banks must perform stress tests under baseline, moderate and severe scenarios prescribed by the BOT to determine potential loss from trading book and AFS portfolios and the effect on capital. - BOT supervisors use results to: - compare across banks, - give feedback to individual banks, - assess total market risk of the banking system. - Key findings: - 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. ### Interest rate risk in the banking book (Principle 23) - Overall assessment: Compliant. - Regulatory framework and requirements: - BOT Notification No. FPG. 42/2551 prescribes qualitative requirements aligned with BCBS July 2004 principles. - Banks must have an interest rate risk management framework including: - (i) Board and senior management oversight; - (ii) risk management policies and procedures; - (iii) effective risk measurement, monitoring and control; - (iv) efficient internal controls subject to independent review. - BOT Notification No. SVG. 5/2552 (Pillar 2) requires interest rate risk impact on economic value to be within a specified threshold: 20 percent of total capital. - Supervisory expectations and practices: - Systems must measure impact of interest rate changes on Net Interest Income (NII) and Economic Value of Equity (EVE) covering all material positions and major currencies; reporting quarterly. - Supervisors assess repricing gap, NII, EVE, balance sheet structure (notably foreign currency and wholesale funding), deposit structure, funding cost (fixed/floating), and movement/rollover rates. - Under ICAAP (Pillar 2), banks must conduct quarterly stress tests; BOT may require supervisory stress scenarios when warranted. - If interest rate risk exceeds acceptable limit, BOT may require banks to increase capital or reduce exposures using authority under Section 30 of FIBA. - Specific supervisory assessments mapped to Essential Criteria: - EC1: Framework elements, Board roles, policy content, measurement and stress testing requirements. - EC2: Supervisors review Board, RMC and ALCO minutes to confirm approval and periodic review of strategy, policies and processes. - EC3: Supervisors assess measurement systems, model validation (especially for Advanced Banks and behavioral adjustments), limits approved by Board, exception tracking, and information systems. - EC4: Banks required to include appropriate scenarios (abrupt benchmark shifts, basis risk, yield curve risk); supervisors validate data accuracy, assumptions, and incorporation of stress test results into limits and Board reporting. - Additional criteria: - AC1: Banks submit quarterly interest rate risk reports with standardized interest rate shock of +_100-basis points on NII and EVE by major currencies and all currencies repricing gap; supervisors evaluate impacts. - AC2: ICAAP review requires banks to examine economic value impacts from at least 200 basis points change; if economic value changes by more than 20 percent of total capital, banks must enhance risk management or mitigate exposure; BOT may order reduction of risk or increase capital. - Findings and comments: - Main exposure: fixed car loans funded by floating rate deposits; exposure is small, less than 8 percent of total loans and housed in banks BOT judges able to manage the risk. ### Liquidity risk (Principle 24) - Overall assessment: Compliant. - Quantitative requirements: - BOT Notification No. FPG. 9/2558: Liquidity Coverage Ratio (LCR) Requirement. - Phase-in started at 60 percent in January 2016 and increased by 10 percent each year until 100 percent in January 2020. - Currently, banks are required to maintain LCR at 80 percent. - BOT Notification No. FPG. 1/2561: Net Stable Funding Ratio (NSFR) Requirement effective since July 2018. - Non-compliance with Section 63 and 64 of FIBA leads to penalties under Section 128 of FIBA; breaches considered conditions that may cause damage to the public interest and enable BOT actions under Section 90 of FIBA. - Qualitative requirements: - BOT Policy Guidelines on Liquidity Risk Management align with BCBS September 2008 Principles; require governance, maturity mismatch management, intraday liquidity, early warning systems, stress testing and contingency planning. - Supervisory monitoring tools and scope: - Contractual and behavioral adjusted maturity mismatch, concentration of funding, LCR breakdown by significant currency. - EC2–EC4 supervisory expectations (framework, Board approval, information systems, intraday management, model validation, reporting and EWS). - EC5 funding strategy expectations: - Banks to hold diversified HQLA and alternative funding sources; supervisors review stress tests, asset liquidation capacity, funding concentration, counterparty relationships, and capacity to sell assets. - EC6 contingency funding plans (CFP): - CFP must be documented, specify responsibilities and communication plans (including with supervisor), be regularly tested, and feasible given bank’s risk profile and systemic importance. - Supervisors assess early warning indicators, handling processes for shortfalls, and back-up funding feasibility. - EC7 stress testing: - Banks to conduct at least quarterly stress tests under bank-specific, market-wide, and combined scenarios; supervisory scenarios include baseline, moderate and severe scenarios affecting LCR via deposit structure, NPLs, asset value declines, and liquidity support to subsidiaries. - Stress test outcomes must inform remedial actions, liquidity cushions, contingency plans. - EC8 foreign currency liquidity: - Banks must measure and manage significant foreign currency liquidity transformations separately; BOT Notification No. FPG. 74/2551 limits net FX positions to not exceed 15 percent (individual currency) and 20 percent (aggregate) of total capital at end of each day. - AC1 encumbrance monitoring: - BOT monitors encumbered balance-sheet assets via monthly supervisory reports; most encumbrance arises from Repurchase transactions (Repo) and are disclosed and excluded from liquid asset pools. - Operational summary: - Liquidity monitored through gap analysis and primarily derived from deposits; LCR and NSFR adopted. ### Operational risk (Principle 25) - Overall assessment: Compliant. - Framework and supervisory approach: - BOT Policy Statement on Operational Risk Management (August 2008) expects comprehensive framework with Board oversight, effective systems, and public disclosure. - Supervisors review ORM policies, BCM/BCP, IT risk, outsourcing. - Assessment includes end-to-end business line reviews, internal audit reports, and remediation directives where shortfalls exist. - Key supervisory checks mapped to EC1–EC8: - EC1–EC3: Board approval, periodic review, implementation and integration into overall risk management; review of meeting minutes, operational loss reports, KRIs, RCSA. - EC4: Disaster recovery and BCP: identification of critical functions, recovery objectives, test results, staff awareness; BOT conducts IT-DRP tests annually for critical payment systems (e.g., BAHTNET and ICAS) including industry-wide tests. - EC5: IT risk governance and infrastructure: IT stress testing at least annually and upon significant change; BOT Notification No. FPG.19/2560 requires IT risk in ERM and compliance with CIA principle; BOT issues IT best practices and IT Risk Management Implementation Guideline and Cyber Resilience Assessment Framework. - EC6: Operational risk data collection, reporting and use for Board/senior management decision-making; supervisors verify integration and effectiveness. - EC7: Ongoing supervisory information flows via executive meetings, strategic plan reviews, fit-and-proper processes, and periodic operational loss reporting; data used to set supervisory focus. - EC8: Outsourcing risk management under BOT Notification No. FPG. 8/2557 and FPG.19/2559 for IT outsourcing: due diligence, contracts, monitoring, contingency planning, right-to-inspect clauses, and BCP testing. - AC1 concentration risk: - Supervisors identify common points of exposure from outsourcing and focus on large/high-impact payment and e-Payment providers (e.g., National ITMX, PCC, TPN); IT examination standards based on BOT topology and international frameworks (FFIEC, HKMA, NIST, ISACA, COBIT, ISO 27001). ### Internal control and audit (Principle 26) - Overall assessment: Compliant. - Regulatory framework: - BOT Notification No. FPG.10/2561: Corporate Governance of Financial Institutions defines Board responsibilities and required control environment elements. - BOT Policy Statement on Internal Audit (August 2008) sets scope and expectations. - Supervisory assessments mapped to EC1–EC5: - EC1: Organizational structure, accounting policies, segregation of duties, safeguarding of assets; BOT examines IT security for physical and software protections in sensitive areas (dealing room, data center, funds transfer). - EC2: Balance of skills and resources in back office and control functions; supervisors review personnel records and interview staff. - EC3: Independent compliance function with reporting lines to Board or head of compliance; supervisors evaluate structure, resources, policies and Board participation. - EC4–EC5: Internal audit independence, resourcing, status, access, methodology, risk-based audit planning, ability to assess outsourced functions; Head of Internal Audit reporting to Audit Committee or Board; BOT discusses findings with Audit Committee. - Supervisory actions: - Deficiencies are documented in examination reports and monitored for corrective actions. ### Financial reporting and external audit (Principle 27) - Overall assessment: Compliant (implied by continuity). - Legal and supervisory responsibilities: - Accounting Act B.E. 2543 (2000) and FIBA provisions place duty to keep accounts and empower BOT to hold Boards and management responsible for accurate accounting in line with TASs/TFRSs and BOT rules (Sections 27(2), 66, 67, 68 of FIBA; BOT Notification No. FPG. 21/2558). - Banks must retain accounting records and supporting documents for a minimum period of five years. *Source: 1thaea2019004 - 2. Supervisory stress scenarios: for trading book and available for sale (AFS) positions, the* ### Section 146(2) and (3) of FIBA clearly states a penalty for the banks’ director, manager or ### 1thaea2019004 - Section 146(2) and (3) of FIBA clearly states a penalty for the banks’ director, manager or ### Legal framework and penalties - Section 146(2) and (3) of FIBA: penalty for the banks’ director, manager or person with power of management in the case of false entry or failure to enter significant statement in the accounts or documents of the financial institutions; or incomplete, incorrect, out-of-date or untrue accounts. - Section 67 and 68 of FIBA and BOT Notification No. FPG. 21/2558: require banks (locally-incorporated and foreign bank branches) to publish annual financial statements, including the auditor’s report, in public area at their commercial premises, in newspapers, on their websites, and submit them to the BOT no later than four months after the end of each financial year. - Locally-incorporated banks: publish first half-year financial statements and submit them to the BOT no later than three months after the end of first half-year. These financial statements must bear an opinion from the external auditors approved by the BOT. - Section 69 of FIBA: BOT has authority to rescind approval of an auditor unable to meet BOT conditions. - Section 70 of FIBA: auditors must promptly notify the BOT and submit relevant document or evidence if they have reasonable ground to suspect fraudulent act in any banks. - Section 71 of FIBA: empowers the BOT to appoint an auditor or specialist to conduct an audit and report results to the BOT. - Section 71 and 85 of FIBA: empower the BOT to request auditors to testify or provide information, accounting records, documents and other evidence relating to the business of banks within a specified period, where necessary. ### Accounting and auditing standards - TASs/TFRSs promulgated by the Federation of Accounting Professions (FAP) are closely modeled after IASs and IFRSs. - BOT notifications on loan loss provision and derivatives: requirements for all banks are more conservative than IAS 39 and result in outcomes comparable to IFRS 9. - FAP currently adopts TSA 200: Overall objectives of the independent auditor and the conduct of an audit in accordance with the standards on auditing, requiring auditor independence and compliance with relevant auditing standards and ethics. - Accounting Professions Act B.E. 2547 (2004) requires auditors to perform duties in accordance with TSA, including TSA 320 and TSA 330: - TSA 320: Materiality in Planning and Performing an Audit — auditors plan and perform audit based on risk and materiality. - TSA 330: The Auditor’s Responses to Assessed Risks — auditors design and implement audit plan including scope, timing, and extent in response to risks of material misstatement. - BOT Notification No. FPG. 5/2558: Regulation on the Approval of an Auditor — requires auditors to submit an audit program, working papers, and other documents as requested by the BOT. - External auditors of most Thai banks are professional firms (Ernst & Young, KPMG, Deloitte, and PwC). ### Supervisor duties and ongoing supervision (financial reporting and audits) - BOT supervisors perform the following duties with respect to financial reporting and audits: - Evaluate responsibilities of banks’ Audit Committee in ensuring accuracy of banks’ financial statements and check whether audited financial statements are presented to the banks’ Audit Committee on a quarterly basis. - Verify whether banks have established sound management information system (MIS), IT systems and internal controls to produce adequate and reliable data for preparing the financial statements. - Review whether banks prepare financial statements in compliance with relevant accounting standards, the BOT notifications and other relevant laws. - The supervisor holds the bank’s Board and management responsible for ensuring that annual financial statements issued to the public bear an independent external auditor’s opinion as a result of an audit conducted in accordance with internationally accepted auditing practices and standards. ### Valuation practices and provisioning (EC3) - Banks required to prepare financial statements in accordance with TASs/TFRSs and BOT rules, which include valuation practices. - Section 60 and 61 of FIBA require banks to set provisions of performing assets, non-performing assets and contingent liabilities in accordance with BOT Notification No. FPG. 5/2559: Guidelines on Asset Classification and Provisioning of Financial Institutions — impairment and provisioning based on incurred loss impairment model of IAS 39; banks shall assess credit quality of assets correctly and set provision for potential impaired assets (e.g., rescheduled/restructured loans, loans breaching financial covenants). - Trading book instruments measured at fair value: conform to BOT Notification No. FPG. 94/2551 Regulations on Market Risk and Capital Requirements for Market Risk in Financial Institutions; measure in accordance with TFRS 13: Fair Value Measurement (based on IFRS 13). - Marking-to-market: banks must use data from independent and acceptable sources, for instance, Reuter and Bloomberg. - Marking-to-model: banks required to set governance structure and control processes; model development based on widely accepted principle and reliable inputs; model validated and approved by an independent unit; periodic verification of model accuracy at least once a year. - No difference between valuations used for financial reporting purpose and for regulatory purpose because BOT does not specify additional valuation requirements; banks required to prepare only one set of financial statement. - BOT supervisors assess whether banks have fair valuation policies and processes approved by appropriate committee; evaluate valuation process (methods and systems), independence, timeliness and accuracy; perform walkthroughs and meetings to verify consistency and officer understanding. - For internal provisioning models, BOT supervisors verify provisioning estimation and valuation process, including model governance, appropriation of provisioning and provisioning system; inspection focuses on data sampling for accuracy and consistency with methodology documents and reporting. - During the transition period to IFRS 9 in 2020, the BOT has engaged banks to improve provisioning models in response to IFRS 9, especially provisioning calculation system. ### Audit scope, auditor approval, rotation, and engagement (EC4–EC8) - EC4: Section 71 of FIBA empowers BOT to appoint auditor/specialist; BOT Notification No. FPG. 5/2558 lists duties of auditors to perform audit in accordance with TSA and to submit audit program, working papers, and other documents as requested by the BOT; BOT empowered to extend audit scope if auditors discharge duties improperly. - EC5: Audits cover significant banking areas — loan portfolio, loan loss provisions, nonperforming assets, asset valuations, trading and other securities activities, derivatives, asset securitizations, consolidation and off-balance sheet vehicles, adequacy of internal controls over financial reporting — consistent with TSA 320 and TSA 315 requirements. - EC6: BOT has power to reject and rescind appointment of external auditor deemed to have inadequate expertise or independence or not adhering to professional standards. - BOT Approval criteria include auditor’s independence, ability to perform audits with professional skepticism and in compliance with TSA, and not having been suspended and revoked approval by other regulators such as the SEC and the Revenue Department. - Banks shall inform the BOT at least 30 days prior to annual appointment of approved auditors; BOT has power to reject and rescind that appointment within 15 business days. - EC7: BOT Notification No. FPG. 5/2558 prohibits banks from appointing the same external auditor for more than 5 consecutive financial years; individual auditors within an audit firm must be rotated when their 5-year term ends. - EC8: BOT holds annual meetings with external auditors (without presence of banks) to discuss accounting and auditing issues, audit plans, findings and other concerns. Sample discussion issues: - Auditors’ key concerns, focus areas for current financial period and subsequent period, and views on impact of changes to the banks’ organizational structure and management. - Changes in accounting standards and their impact to banks and implementation challenges. - Quality of management oversight on internal control. - Follow up on the BOT’s supervisory concerns on banks. - Other contacts with auditors via telecommunications or emails are made on an ad-hoc basis for specific issues (e.g., breaches of laws or errors). ### Auditor reporting obligations and protections (EC9) - Section 69 of FIBA and BOT Notification No. FPG. 5/2558 require external auditors to directly report to the BOT matters of non-compliance with relevant laws and regulations, significant deficiencies or weaknesses of internal controls and financial reporting process, and any findings and recommendations on operating performance and management issues. - Section 70 of FIBA requires auditors to promptly notify the BOT and submit relevant documents/evidence if auditors have reasonable ground to suspect fraudulent act in any banks. - Examples of issues reported by external auditors: weakness of internal control of opening account at branch operation; error of interest rate record of syndicated loan; incorrectness of collateral valuation record in the collateral system; deficient IT general control due to limited space to keep transaction logs and insufficient password management of high-privileged user. - Given statutory duty of disclosure by auditors under Section 154 of FIBA and the Accounting Professions Act B.E.2547 (2004), auditors who make such reports in good faith are protected from being held liable for breach of confidentiality. ### Access to working papers and evidence (AC1) - Section 71 and 85 of FIBA empower the BOT to request auditors to testify or provide information, accounting records, documents and other evidence relating to the business of banks within a specified period, where necessary. - BOT Notification No. FPG. 5/2558 requires auditors to submit an audit program, working papers, and other documents as requested by the BOT. ### Assessments and key conclusions - Assessment of Principle 27: Compliant. - Comments: At the assessment date, the Thai accounting standards are generally in line with IFRS. The BOT's asset classification and provisioning standards for CL/PIL are more conservative standards for provisioning than IAS 39. Quantitative impact studies have revealed that the quantitative outcomes are closer to IFRS 9. - Transition note: In 2020, once TFRS 9 comes into force, the financial statements of Thai banks will be fully aligned with widely accepted international standards. - Principle 28 (EC1): Section 66 of FIBA requires banks prepare accounts to reflect true and fair view in accordance with TASs/TFRSs and BOT rules; BOT issued notifications on accounting practices to provide practical guidance to promote understanding and comparability among banks’ financial statements. *Source: 1thaea2019004 - Section 146(2) and (3) of FIBA clearly states a penalty for the banks’ director, manager or* ### Section 67 and 68 of FIBA and the BOT Notification No. FPG. 21/2558: Preparation and ### 1thaea2019004 - Section 67 and 68 of FIBA and the BOT Notification No. FPG. 21/2558: Preparation and ### Preparation and announcement of financial statements (Sections 67–68 of FIBA; BOT Notification No. FPG. 21/2558) - Banks must prepare financial statements, both on a consolidated and solo basis, consistent with the format prescribed in the BOT notification. - Scope: - First 6-month period of the financial year (locally incorporated banks only). - Financial year (both locally incorporated banks and foreign bank branches). - Audit and approval: - Financial statements must be audited by a qualified auditor and approved by the banks’ directors. - Publication and submission timelines: - Audited financial statements and auditor’s report shall be posted in a public area at the head office (locally incorporated bank and branches), on the banks’ website, in newspapers, and submitted to the BOT: - within 3 months after the first 6-month period-end; and - within 4 months after the financial year-end. - Foreign bank branches shall publish the financial statements of the foreign bank within 1 month after the head office’s announcement. - The notification prescribes the format and minimum information to be disclosed. ### Listed banks (SET) and additional BOT disclosure (FPG. 23/2558) - SET-listed banks timing requirements (Section 56 of the Securities and Exchange Act B.E. 2535 (1992)): - 1st and 3rd quarter: not later than 45 days after quarter-end. - First-half: not later than 60 days after period-end. - Full financial year: not later than 90 days after period-end. - BOT Notification No. FPG. 23/2558: Preparation and Disclosure of the Summary Statement of Assets and Liabilities: - Requires monthly preparation and disclosure of the summary statement of assets and liabilities certified by the managing director and accounting director. - Exhibition requirements: public area at head office and branches, banks’ website and in a newspaper. - Minimum information to be disclosed includes capital adequacy ratio, NPL ratio, and off-balance sheet transactions. ### Disclosure content requirements (EC2) — scope and minimum content - Required disclosures include both qualitative and quantitative information on: - financial performance, financial position, risk management strategies and practices, risk exposures; - aggregate exposures to related parties, transactions with related parties; - accounting policies, and basic business, management, governance and remuneration. - Scope and level of disaggregation are commensurate with the bank’s risk profile and systemic importance. - BOT Notification No. FPG. 21/2558 prescribes minimum information in statements of financial position, income, changes in equity, cash flows, and notes, including: - basic business activities and risk profile; - risk management strategies and practices; - significant risk exposures; - capital adequacy ratio; - basis for preparation of the financial statements; - accounting policies, use of estimations and assumptions; - transactions with related parties; - remuneration of the Board and senior management. - Remuneration disclosure: - BOT Notification No. FPG.10/2561: Corporate governance of financial institutions requires disclosure of remuneration and benefits of directors on an individual basis and senior management as an aggregate amount to the annual general meeting; disclose remuneration policy and various forms of remuneration in the annual report. - Pillar 3 disclosure requirements (Section 31 of FIBA; BOT Notifications FPG. 4/2556 and FPG. 5/2556): - Describe scope of application, capital structure and capital adequacy, risk exposures and risk assessment covering credit risk, market risk, operational risk, and interest rate risk in the banking book, consistent with current Basel standards. - BOT provides sample templates banks may utilize for reporting quantitative information to enable comparison among banks. - Supervisory review: - BOT supervisors regularly review whether banks have disclosed accurate and complete information and whether Pillar 3 disclosures are sufficient for meaningful analysis across the banking industry. ### Group structure disclosure (EC3) - Legal and regulatory provisions: - Section 66 of FIBA: banks prepare financial statements in compliance with TASs/TFRSs as prescribed by the FAP and BOT rules. - Sections 67 and 68 of FIBA: require locally-incorporated banks and foreign bank branches to prepare financial statements according to BOT-prescribed format and disclosure template. - TFRS 12 (Disclosure of Interests in Other Entities) requires disclosure enabling users to evaluate components of business groups, including: - name of related entities, ownership proportion, voting right, and financial information summary of subsidiaries. - BOT Notification No. FPG 21/2558 requires solo and consolidated financial statements and disclosure of related entities (subsidiaries and associates) including: - names, nature of business, type of securities, ownership proportion and value of securities investment (cost and equity method). ### Enforcement and supervisory review (EC4) - BOT supervisory activities: - Review accuracy and completeness of disclosures (financial position, operating performance, risk management) as detailed in audited financial statements. - Check timeliness and presentation in accordance with regulations. - If non-compliant, supervisors inform banks to make corrections and may propose litigation and fines. - Penalties: - Non-compliance with Section 31 of FIBA (e.g., BOT Pillar 3 Notification) liable to penalty charge in accordance with Section 128 of FIBA. - SEC and Ministry of Commerce roles: - SEC monitors and enforces compliance of listed banks with TASs/TFRSs and SEC regulation; Section 274 of Securities and Exchange Act B.E. 2535 (1992) prescribes penalties for listed banks that fail to comply. - All corporations must submit annual audited financial statements to the Department of Business Development, Ministry of Commerce within one month after financial statements’ approval; penalties under Section 30 and 32 of the Accounting Act B.E. 2543 (2000) apply for non-compliance. ### Aggregate public reporting (EC5) - BOT publishes aggregate statistics on the Thai banking system on its website to facilitate public understanding, including: - balance sheet, income statement, provision, financial ratios and capital ratios. - Annual Financial Stability Report (FSR): - Published annually to help stakeholders understand risks in the Thai financial system and indicators for financial conditions and risks to Thailand’s financial stability. - Joint Meeting press releases: - Press releases on the summary conclusion of the Joint Meeting of the Monetary Policy Committee and the Financial Institutions Policy Committee are available twice a year. ### Additional disclosure criteria (AC1) - Disclosure requirements promote information to understand a bank’s risk exposures during a reporting period, including average exposures or turnover. - Example (BOT Notification No. FPG. 4/2556): - Banks must disclose gross credit exposures and average gross credit exposures over the reporting period, broken down by major types of credit exposure. - Disclose geographic and industry distribution of credit exposures, residual contractual maturity, all broken down by major types of credit exposure. --- ### AML/CFT supervision and abuse of financial services (Principle 29) - Designation and legal framework (EC1): - AMLO designated as the AML/CFT supervisory authority since the amendment of the Anti-Money Laundering Act (AMLA) in 2013. - Sections 40(3/1) and (4) of AMLA prescribe AMLO to establish guidelines, examine, monitor and evaluate implementation of AML/CFT obligations in cooperation with sector-specific supervisors (BOT, SEC, and OIC). - Financial institutions must comply with regulations of both BOT and other regulators, including AMLO’s AML/CFT regulations. - Key AML/CFT regulations and requirements: - Reporting Requirements: Section 13 of AMLA specifies transaction reporting to include STR requirements. - CDD and internal controls: Ministerial Regulation on Customer Due Diligence (MR CDD), Section 4 and Section 20/1 of AMLA set out customer acceptance, risk assessment and management, CDD and ongoing monitoring requirements. - MR CDD covers correspondent banks, wire transfer, new technologies, reliance on 3rd party, internal controls, foreign branches and subsidiaries, high risk countries, tipping-off and confidentiality. - BOT Notification No. FPG. 7/2559: Regulations on Acceptance of Deposits or Money from Customers requires proper e-KYC for electronic account opening and transfers and operation under an appropriate risk management framework. - Inspection authority and coordination (EC1 continued): - AMLO inspection powers: Section 40(3)/1 and 40(4) of AMLA. - BOT inspection power: Section 85 of FIBA. - BOT and AMLO coordinate under an MOU of April 2015: BOT informs AMLO of non-compliance; AMLO may investigate or join BOT examinations; AMLO proceeds under its law and BOT may consider legal proceedings if BOT guidelines breached. - Coordination includes specifying a Contact Person, pre-examination, onsite examination, post-examination cooperation, and personnel development. - Policies and procedures (EC2): - AMLO requires banks to have policies and procedures promoting high ethical and professional standards. - Article 48 of MR CDD and AMLO Notification require a Board- or senior management-approved plan for development and improvement of ML/TF risk assessment and management policies and procedures. - Required policy content includes customer acceptance processes and a risk management approach covering customer risk assessment, transaction monitoring, and document retention; guidelines/manuals must be periodically updated. - Section 13 of AMLA requires reporting of CTRs, PTRs, wire transfers and STRs to AMLO. - BOT treats AML/CFT as part of operational and compliance risk assessment; BOT Policy Statement on Operational Risk Management and BOT Policy Statement on Supervision of Financial Institutions’ Compliance (August 2008) prescribe Board roles and periodic reviews. - Ongoing monitoring and examination: - AMLO: - Reviews policies and procedures to ensure compliance and effective implementation commensurate with risk profiles. - Offsite monitoring includes STR data analysis and communication with financial institutions; STR statistic reports are sent to BOT. - BOT: - Offsite reviews of AML/CFT policies, internal and external audit reports, and reports submitted to BOT (committee minutes, annual compliance report, loss data report). - BOT may initiate onsite examinations or site visits for identified issues. - Onsite examinations verify practices against policies via staff interviews and random transaction testing (account opening document completeness, CDD, respondent bank CDD, screening against lists of designated persons and politicians, reporting to AMLO, system performance, document retention). - Reporting of material suspicious activities to BOT (EC3): - Banks must report corrective actions within 15 days when noncompliance detected (BOT Policy Statement on Supervision of Financial Institutions’ Compliance (August 2008)). - Immediate reporting required for issues that could severely damage operations or financial position (fraud, non-compliance with law, unusual incidents). - Banks must report loss data caused by human error, system error, external event, internal and external fraud (BOT policy statement on Operational Risk Management and BOT Letter requesting loss data submission). - BOT monitors news sources and coordinates with agencies (including AMLO) to detect unusual transactions or events and may order immediate corrective actions. - Information sharing (EC4): - If the supervisor becomes aware of additional suspicious transactions, it informs the financial intelligence unit and, if applicable, other designated authorities; the supervisor shares information related to suspected or actual criminal activities with relevant authorities. *Source: 1thaea2019004 - Section 67 and 68 of FIBA and the BOT Notification No. FPG. 21/2558: Preparation and* ### Section 154 (4) of FIBA gives the BOT power to disclose information for the benefit of ### 1thaea2019004 - Section 154 (4) of FIBA gives the BOT power to disclose information for the benefit of ### BOT authority and inter-agency coordination - Section 154 (4) of FIBA gives the BOT power to disclose information for the benefit of domestic and foreign supervisors in performing their duties. - BOT has an MOU with AMLO dated 10 April 2015 to exchange information and to provide mutual support. - If supervisors find suspicious transactions, the BOT will inform relevant authorities such as the Financial Intelligence Unit at AMLO to investigate the suspicious transaction or illegal action in a timely manner. - If BOT supervisors find that banks do not operate in accordance with AML/CFT laws, the BOT will coordinate with AMLO to impose legal actions in accordance with the law and regulations. - Example action: When BOT uncovered Facebook pages that posted illegal purchase of bank account books and ATM cards, BOT coordinated with AMLO to: - issue statements through various news media to warn the public that sale of any savings books to others is illegal and that such pages may involve money laundering activities; - conduct a joint investigation; - instruct all commercial banks to tighten their internal controls; - hold banks accountable for negligence if ID cards of other individuals are used to open bank accounts. ### STR reporting expectation (consistent with international standards) - Banks are to report suspicious activities involving cases of potential money laundering and the financing of terrorism to the relevant national centre, established either as an independent governmental authority or within an existing authority or authorities that serves as an FIU. ### Customer Due Diligence (CDD) program requirements (EC5) - The supervisor determines that banks establish CDD policies and processes that are well documented and communicated to all relevant staff, integrated into the bank’s overall risk management, and include appropriate steps to identify, assess, monitor, manage and mitigate ML/TF risks with respect to customers, countries and regions, as well as products, services, transactions and delivery channels on an ongoing basis. - The CDD management program, on a group-wide basis, has as its essential elements: (a) A customer acceptance policy that identifies business relationships that the bank will not accept based on identified risks. (b) A customer identification, verification and due diligence programme on an ongoing basis; this encompasses verification of beneficial ownership, understanding the purpose and nature of the business relationship, and risk-based reviews to ensure that records are updated and relevant. (c) Policies and processes to monitor and recognize unusual or potentially suspicious transactions. (d) Enhanced due diligence on high-risk accounts (e.g., escalation to the bank’s senior management level of decisions on entering into business relationships with these accounts or maintaining such relationships when an existing relationship becomes high-risk). (e) Enhanced due diligence on politically exposed persons (including, among other things, escalation to the bank’s senior management level of decisions on entering into business relationships with these persons). (f) Clear rules on what records must be kept on CDD and individual transactions and their retention period. Such records have at least a five year retention period. ### Supervisory review criteria and findings relating to CDD - Supervisors determine whether: - Banks have in place written CDD policies and procedures that are approved by the Board or senior management and are integrated into the banks’ overall risk management practices (as required under Article 4 of MR CDD). - Banks conduct ongoing assessment and management of ML/TF risk of their business using appropriate criteria (in particular, customers’ location/country, product & service, transaction type and service channel), implement risk mitigation measures, review CDD relevant information, and update accurate and complete risk assessment and management analysis which is sent to AMLO (as required under AMLO Notification Concerning Guidelines for Issuing Policy and Procedures for Assessment and Management of Risk Related to ML/TF). - Policies are communicated to staff for their understanding (as required under Article 8 of MR CDD) and periodically reviewed and kept up-to-date (as required under Article 4 of MR CDD). - Banks’ foreign offices, branches or majority-owned subsidiaries implement ML/TF risk management policies and apply CDD measures as appropriate to their business category (as required under Article 49 of MR CDD). - Supervisors assess banks’ CDD policies and procedures according to AMLO Notification on policies and procedures as follows: (a) Review whether the customer acceptance policies are set and procedures for approving business relationships establishment or rejection with the customer adhere to the guidelines on customer identification, verification, and due diligence under anti-money laundering law. (b) Review whether CDD policies are adequate to facilitate effective due diligence and risk management for all customers, taking into consideration risk factors as prescribed by law and whether regular risk management is performed throughout the business relationship period. Risk management starts from verification to ensure that the customer is not listed for terrorism involvement by the United Nations or AMLO and includes risk classification, transaction monitoring, due diligence, and risk review until the termination of business relationship. ### Article 19 CDD program requirements (as referenced) - According to Article 19 of MR CDD, banks’ CDD program must include: - Identifying the customer and verifying the customer’s identity using documents, data or information from publicly accessible, reliable sources in addition to those obtained from the customer. - Identifying the ultimate beneficial owner and taking appropriate measures to verify the identity of the ultimate beneficial owner. - Checking customer information and that of the ultimate beneficial owner against the list of persons, groups of persons, legal persons, or entities designated under the resolution of the UN Security Council or notification of terrorists or person designated under the Counter-Terrorism and Proliferation Financing Act (CTPF Act). - Obtaining information from the customer regarding the purpose and intended nature of the business relationship. - Checking financial movements, transactions, and information about the conduct of business relationship and transactions undertaken throughout the course of the relationship to ensure that transactions conducted are consistent with the purpose of the business relationship or as stated by the customer, the business and risk profile and other available information on the customer, as well as checking to ensure that data on the customer especially about the source of funds are up-to-date. ### Transaction monitoring and suspicious transaction reporting (Article 8; Sections 13(3) and 14 of AMLA) - Review whether banks have policies and procedures for transaction monitoring and suspicious transaction reporting. - Policies must specify that when banks suspect there is a transaction involving money laundering or terrorist financing, the banks shall take special care in performing the customer due diligence process. If there are reasonable grounds to believe that performing the customer due diligence process will alert the customer or potential customer, they may choose not to pursue that process and file a suspicious transaction report to AMLO (as required under Article 8 of MR CDD). - Banks must report any suspicious transaction to AMLO when there are reasonable grounds to believe that a transaction is conducted to avoid compliance of AMLA or a transaction is connected or possibly connected with a warrant to establish an offense or terrorist financing offense, notwithstanding the transaction being single or multiple and including an attempt to conduct such a transaction (as required under Section 13(3) and 14 of AMLA). ### Risk-sensitive CDD measures and PEPs - Review whether banks have established categories of CDD measures to be performed for each customer consistent with his/her ML/TF risk and the measures stated in Article 15 of MR CDD include but not limited to: - Obtaining additional information or evidence on customer’s business, sources of funds/income, intended nature of the relationship, or reasons for intended/actual transactions. - Obtaining the approval of senior management, including approval of the results verified from the CDD process. - Conducting enhanced examination and monitoring of financial movements for high-risk customers, by increasing the frequency of transaction monitoring and the frequency of examination and verification of customer’s or beneficial owner’s identity. - If the risks are lower, simplified CDD measures may be applied. - Review whether banks have adequate policies, procedures and processes to identify both domestic and foreign PEPs. The definition of PEPs must encompass family members or those closely associated with PEPs and be in line with the requirements under AMLO notification concerning PEPs. Commencement or continuity of the business relationship with PEPs must obtain approval from the banks’ senior management (as required under Article 15 of MR CDD). ### Record retention and accessibility (Section 22 (1) of the AMLA; AMLB Ordinance on Record Keeping (2016)) - Review the document retention policy which require banks to retain information on customer identification records and due diligence records for a period of five and ten years, respectively, from the date the account was closed or relationship was terminated (as required under Section 22 (1) of the AMLA). - Supervisors will evaluate if banks’ policy requires for CDD related records to be sufficient to permit reconstruction of individual transactions for the purpose of investigations and prosecutions. - Supervisors will check whether CDD information is kept accurate, complete, safe, reliable, and retrievable and able to be submitted upon request by the authorities (as required under Article 6–8 of the AMLB Ordinance on Record Keeping (2016)). ### Correspondent banking requirements (EC6) - The supervisor determines that banks have in addition to normal due diligence, specific policies and processes regarding correspondent banking. Such policies and processes include: - Gathering sufficient information about their respondent banks to understand fully the nature of their business and customer base, and how they are supervised. - Not establishing or continuing correspondent relationships with those that do not have adequate controls against criminal activities or that are not effectively supervised by the relevant authorities, or with those banks that are considered to be shell banks. - As part of ongoing supervision, the BOT supervisors will review and assess whether banks have policies and procedures relating to correspondent relationships that address: - Collecting information when entering into a relationship with a respondent bank to perform CDD, including nature of the business, target customers, quality of banking supervision, negative record in relation to AML/CFT evaluation or punishment under AML/CFT law (as required under AMLO Guidelines on Customer Due Diligence under AML for the Banking Sector). - Identification of the ultimate beneficial owners (“UBOs”) and verify customer and UBO data against the UNSC designated lists, as well as verify trustworthiness of the respondent bank and assess reliability of agencies responsible for the respondent bank’s AML/CFT supervision (as required under Article 43 of MR CDD). - Refusing to enter into a business relationship or conducting a transaction if a respondent bank does not have in place effective AML/CFT controls or the respondent bank’s UBOs are involved in ML/TF activities, and additional due diligence measures are required when establishing the respondent relationship (Article 44 of MR CDD). - Prohibiting entering a relationship with a shell bank or an authorized respondent bank which is not physically located within the authorized country or physically located in the authorized country but not conducting business in the location that it is supervised (Article 42 of MR CDD). ### Operational controls, supervision practices and AML/CFT self-assessment (EC7) - The supervisor determines that banks have sufficient controls and systems to prevent, identify and report potential abuses of financial services, including money laundering and the financing of terrorism. - Description and supervisory practices: - BOT supervisors monitor and assess whether banks effectively prevent, identify, and report irregularities related to money laundering and financial support for terrorism. - BOT supervisors assess whether the Board performs its duties of setting of policies, strategies, and planning, and evaluate policy implementation from issuing guidelines and rules to communication with employees. - BOT supervisors ensure that banks’ operational risk management system is consistent with the banks’ size and business complexity, with loss data collection system in place to be beneficial for operational risk management, which includes AML/CFT risk. - During onsite examination of AML/CFT, supervisors randomly test actual practice against policies and regulations of the BOT and relevant authorities to evaluate efficiency of the internal control system. - Examples of systems reviewed: screening lists of customers in various systems including Worldcheck, SAS, PRIME filter, and OTL and suspicious transaction monitoring in NorKom and RisqVu. - Banks are required to regularly review the STR rules and completeness of Loss Data Reporting that relates to employee fraud and use of banks money laundering channel. - Supervisors review AML/CFT issues in the internal audit, compliance, and operational risk management reports. - Supervisors continuously follow up on news, customer complaints, and information received from other agencies, such as AMLO, SEC, and OIC. - AMLO requirement: - Banks regularly assess and manage money laundering and terrorist financing risk (AML/CFT Self-Assessment) by considering ML/TF risk factors such as risks arising from customer, geography, products, services, nature of transaction, and service channels. - AMLO reviews reasonableness of the assessment factors and results of the AML/CFT risk management assessment (AMLO Guidelines for Issuing Policies and Procedures for Assessment and Management of Risk Related to Money Laundering and Terrorist Financing for Financial institutions and Businesses and Professions). *Source: 1thaea2019004 - Section 154 (4) of FIBA gives the BOT power to disclose information for the benefit of (IMF PDF chapter).* ### Section 40(3/1) of AMLA empowers AMLO to enforce preventive measures on financial ### 1thaea2019004 - Section 40(3/1) of AMLA empowers AMLO to enforce preventive measures on financial ### Legal powers, sanctions, and preventive measures - Section 40(3/1) of AMLA empowers AMLO to enforce preventive measures on financial institutions or individuals, including transaction reporting, conducting customer due diligence, and recording information. - Where a financial institution or individual does not comply with preventive measures related to criminal activities contained in AMLA and any regulations issued pursuant to it, AMLO may: - impose civil and criminal penalties, - levy fines, and/or - take legal actions for imprisonment (Section 62–64 of AMLA). - Specific penalties described: - A fine may be levied on any financial institution that fails to report transactions required by AMLA. - Any individual giving false statement or concealing facts may face imprisonment. - Under Section 23–28 of CTPF Act, AMLO has the power to impose civil and/or criminal sanctions if any reporting entity or individual fails to comply with Section 8 or Section 17 of the Act, or who act in a way to commit a terrorist act. - The BOT’s enforcement powers under FIBA: - Section 125 of FIBA: BOT can impose penalties on any financial institution that fails to comply with FIBA, BOT notifications, regulations, or rules prescribed under the Act. - BOT can levy a fine on any bank that fails to comply with BOT Notification No. FPG. 7/2559: Regulations on Acceptance of Deposits or Money from Customers, where such bank will be liable for a fine not exceeding THB 500,000 and a further fine not exceeding 5,000 Baht per day until the rectification has been made. - BOT may require prompt corrections for deficiencies related to internal audit and compliance before a violation or damage occurs. - Other BOT measures include removal of directors or authorized persons, proposing to the MOF revoking the bank license, and requiring publishing information disclosing fines or BOT actions for violation or non-compliance with BOT Notification No. SVG. 1/2561 Re: Regulations on Market Conduct on its website. ### Internal governance, audit, staffing, and training (EC9, EC10, EC11) - EC9 expectations (supervisor determines banks have): - Requirements for internal audit and/or external experts to independently evaluate relevant risk management policies, processes and controls; supervisor access to their reports. - Established policies and processes to designate compliance officers at management level and appoint a dedicated officer for reporting potential abuses (including suspicious transactions). - Adequate screening policies and processes to ensure high ethical and professional standards when hiring staff or entering agency/outsourcing relationships. - Ongoing training programs for staff, including on CDD and methods to monitor and detect criminal and suspicious activities. - Legal and regulatory obligations: - Article 48 of MR CDD requires financial institutions to have: - an independent internal audit mechanism for monitoring and complying with the anti-money laundering law; - procedures for recruiting staff and ongoing staff training to operate under effective AML/CFT policies or measures; - an executive officer to supervise compliance under the AML law. - Section 21/3 AMLA and Article 6 of Ordinance on Organizing Training Dated 15 March 2016 require that the reporting entities under Section 13 and Section 16 are trained for a period of not less than 18 hours per year. - Supervisory practices: - AMLO reviews policies and procedures during offsite monitoring and conducts onsite inspections, including interviews with management and HR to evaluate AML/CFT implementation. - AMLO reviews internal audit reports and external auditor’s reports regarding AML/CFT issues; staff training programs are reviewed for compliance with AML/CFT requirements. - BOT monitors performance of banks’ internal audit and compliance from internal audit reports, data from other regulators, and other relevant information. - Onsite supervisor assessment focuses on: - suitability and independence of AML/CFT internal audit scope, - roles of the Board and senior management in setting policies and independent oversight, - review of outsourced activities per BOT Notification No. FPG. 8/2557: Guidelines on Outsourcing of Financial Institutions, - communication processes and training effectiveness for AML/CFT and CDD matters. - In 2016, the BOT conducted target exams on Compliance & Internal Audit of all Thai banks and communicated findings and improvement issues to individual banks. - EC10 (reporting and MIS): - Article 48 of MR CDD requires banks to appoint a compliance officer to supervise observance of AML laws and regulation. - Onsite inspections evaluate whether banks adequately utilize MIS to provide Boards, senior management and relevant officers with timely and appropriate information, including escalation processes for suspicious activities and STR filing to AMLO in a timely manner. - Supervisors review adequacy and effectiveness of operational risk management for prevention of ML/TF and quality of compliance reports to Audit Committee, Board, and CEO. - EC11 (good faith reporting protection): - Section 19 of AMLA: a report submitted in accordance Section 13-16 of AMLA in good faith by an individual to any supervisory authority shall not render the reporter responsible for any damage arising out of the disclosure. - Section 11 of CTPF Act: a person is excluded from liability for loss or claim resulting from performing the action under Section 8, unless gross negligence is proven. - Section 155 (4) of FIBA: any person that acquires confidential information as an officer or manager shall not disclose such information except to meet regulatory requirements. ### Information sharing, international cooperation, and supervisory coordination (EC12) - AMLO coordination and institutional arrangements: - Under Section 24 of AMLA, there are 6 Qualified Expert Committees and 9 Ex-officio Committees which include representatives from the MOF, MFA, BOT, SEC, and other supervisory authorities. - Section 25 of AMLA gives these Committees power to suggest measures, opinions and recommendations related to AML/CFT. - Under AMLA, the 9 Sub-Committees are set up for policy, law enforcement, supervision, and other AML/CFT issues. Meetings are arranged at least quarterly. - Section 40 (3) of AMLA prescribes that AMLO has the authority to coordinate or exchange any information with international agencies concerning AML/CFT. - The International Cooperation Division of AMLO is responsible for coordination and exchange of information with foreign agencies. - BOT information sharing authorities and arrangements: - Section 154 (4) of FIBA: BOT may disclose or share any information with authorities within the country and with foreign countries for regulating financial institutions or financial businesses. - MOU between the BOT and AMLO dated April 10, 2015: BOT may share and exchange any examination information during pre-examination, onsite examination and examination findings and notices; BOT and AMLO shall discuss, share information or follow-up on issues from onsite examinations related to criminal activities. - Channels for BOT–AMLO collaboration: semi-annual information sharing meetings, e-mail follow-ups, and ad hoc meetings. - Since 2006, BOT has collaborated with supervisors in countries where Thai commercial banks conduct cross-border transactions. BOT has signed MOUs with supervisory authorities including FSA Japan, CBRC China, HKMA Hong Kong, State Bank of Vietnam, MAS Singapore, National Bank of Cambodia, Bank of India, Bank Negara Malaysia, and the Banko Sentral ng Pilipinas. - Bilateral cross-border supervisory coordination arrangements (Exchange letters and MOUs) support licensing, ongoing supervision, information sharing, and AML/CFT coordination; confidentiality of exchanged information is emphasized. ### In-house specialist resources, training, and dissemination of ML/TF risk (EC13) - AMLO in-house investigative and intelligence resources and divisions: - Financial Intelligence Division: conducts financial investigation and analysis of suspicious activities. - Litigation Division: responsible for freezing, seizing, and forfeiting assets under AMLA. - Supervision and Examination Division. - Staffing and capability building: - AMLO officials act as AML/CFT specialists with direct and indirect experience in supervising, examining financial institutions, and evaluating AML/CFT risks. They conduct offsite and onsite examinations following a risk-based approach. - AMLO conducts regular in-house training, participates in domestic and international training/workshops, publishes the National Risk Assessment (NRA), and conducts seminars and publications on emerging ML trends, strategic analysis, typology reports, and red flag indicators. - BOT conducts in-house training for supervisors, hosts seminars (including topics: Compliance with AMLA, International Best Practices on Supervision of AML/CFT, AML/CFT National Strategic Planning, Cyber Crime & Security, Combating Money Laundering, AML/CFT Regulatory & Supervisory Workshop, FATF/APG events). - The Supervision Group established an AML/CFT working group to develop AML/CFT examination guidance and coordinate examinations within BOT and with other agencies. - AML/CFT specialist supervisors have in-depth experience and have undergone AML/CFT intensive courses; all supervisors receive continuous communication and regular training on AML/CFT matters. - Information dissemination to banks: - BOT shares risks of ML/FT found from onsite examinations and ongoing supervision through notices and examination reports. - Senior officials may give public announcements to inform banks’ directors and management about concerns/risks and recommend preventive measures (example: June 2017 speech on the Role of FinTech in the Thai financial system). ### Assessment, gaps, and reform path - Assessment of Principle 29: Largely Compliant. - Noted developments and gaps: - Substantial resources are applied to AML/CFT work, and an AML/CFT strategy (2017–2021) to continue enhancing supervision has been adopted. - In 2017 Thailand underwent a MER by the Asia Pacific Group on Money Laundering. The MER identified gaps in the AML/CFT standards, including: - identification of beneficial owner is not always required to be identified, - there is no explicit requirement for PEP source of wealth to be identified, - originator and beneficiary information for wire transfers is not required for transactions originated by non-customers of the bank. - Amendments to AMLA and Ministerial Regulation are in-process to address these issues. *1thaea2019004 - Section 40(3/1) of AMLA empowers AMLO to enforce preventive measures on financial* ### 2. Independence, accountability, ### 2. Independence, accountability, resourcing and legal protection for supervisors ### Overall assessment and operational context - The process for the appointment and removal of the governor and the members of the FIPC is transparent. - The BOT has adequate resources for the conduct of effective supervision and appropriate training plans. - BOT staff have credibility based on professionalism and integrity. - The BOT regularly benchmarks its salary scales to the market and has sufficient funding to cover overseas inspections and training. - The legal framework for banking supervision includes adequate legal protection for the supervisors. - No objective evidence of lack of independence of the BOT was observed; however, several factors have the potential to interfere with the BOT's operational independence. ### Factors potentially affecting BOT independence (findings) - Permanent membership of the Director General of the Fiscal Policy Office (FPO) on the FIPC is not in accordance with international good practice. The FIPC is a decision-making body. - BOT rationale: presence contributes to checks and balances and facilitates BOT actions during a crisis. - Assessors' view: external accountability can be achieved through mechanisms other than participation in a decision-making body; consider adding FPO membership only during crisis situations or using other coordinating structures. - Presence of the Secretary-General of the Insurance Commission and the Secretary-General of the Securities and Exchange on the FIPC compromises operational independence and dilutes accountability; direct involvement of officials from other agencies in BOT decision making is not good practice. - Section 42 of the BOT Act: - Requires that when a financial institution faces a liquidity problem that may seriously endanger the stability of the economic and monetary system, the BOT, after approval of the FIPC and the Cabinet, may approve granting a loan or financial assistance to that financial institution. - Section 42 affects the independence of the BOT, risks political interference, and implies government underwriting of ELA. Section 42 is likely to be used if a D-SIB requires ELA. - BOT must inform the Minister in case Prompt Preventive Action or Prompt Corrective Action is taken (see Principle 11). - BOT has had negative net worth for several years; assessors confirm BOT continued to adequately discharge duties despite weak financial position. - Weak financial position exacerbates risks to BOT's reputation, independence and vulnerability to political interference. ### Supervision of Specialized Financial Institutions (SFIs) - BOT supervises eight SFIs, each with a different mandate by founding law. - Four SFIs are deposit taking institutions. - Three comply with the definition of a commercial bank in accordance with FIBA. - SFIs are regulated and supervised by the BOT with extensive involvement of the State Enterprise Policy Office (SEPO) as owner and the Fiscal Policy Office (FPO) as policy maker. - This involvement affects the independence of the BOT in regulation and supervision of SFIs and poses a reputational risk. - Supervisory governance: - SFIs are supervised by the Specialized Financial Institutions Supervision and Examination Department, which reports to the Assistant Governor of the Supervision Group, same as commercial bank supervision departments. - Financial Institution Examination Development Sub Committee and Financial Institutions Policy subcommittee decide on both commercial banks and SFIs regulatory and supervisory actions. - Risk of contamination: SFI matters may spill over to commercial bank decision making, particularly where some commercial banks have state ownership. ### Cooperation and collaboration (CP 3) - Domestic and cross-border cooperation and information sharing with domestic and international authorities is effective. - MOUs and supervisory college agendas show evidence of cooperation. - BOT participation in supervisory colleges: - As host: attended four supervisory colleges in 2017 and two in 2018. - As home supervisor: organized one supervisory college in 2018 and two in 2016. - Considered adequate given small exposure of foreign operations. ### Permissible activities, licensing and ownership change (CPs 4, 5, 6, 7) - Law lists permissible activities and bank definition; through subsidiaries, banks may issue securities and insurance products. - Supervision of deposit-taking SFIs under commercial banking standards is undergoing implementation. - Applications for new banks accepted only in pre-determined periods; application process well documented. - Since 2017 two significant ownership change applications were approved and two denied. - Major acquisitions: most applications routine; one denial involved an application to establish an FBG where applicant could not demonstrate sound reasoning or sufficient financial resources. ### Supervisory approach, techniques, reporting (CPs 8–10) - BOT has established a supervisory process supporting a risk-based approach. - Further linking of benchmarks and analysis results to scope of supervisory activities for individual banks would advance risk-focused supervision. - Offsite and onsite reviews are performed by the same supervisory teams under a relationship manager, resulting in ongoing monitoring. - BOT collects financial reports regularly and has authority to collect supplemental information. ### Corrective powers and consolidated supervision (CPs 11, 12) - Internal enforcement action guideline should be amended to expand circumstances for applying Chapter 5 measures. - BOT supervises FBGs, including holding companies, on a consolidated basis. - BOT can request all information required for proper supervision and performs fit-and-proper on significant shareholders, directors and management. ### Corporate governance and Board practices (CP 14) - BOT comprehensively assesses corporate governance policies and processes commensurate with risk and systemic importance. - Corpus of regulations, guidelines, and supervisory manual in corporate governance is comprehensive, enforceable, and in line with international good practice. - BOT notifications: - Corporate governance notifications effective: solo basis since April 2017 and consolidated basis since June 2018. - BOT issued "Regulations on Risk Supervision of Financial Business Group" effective in June 2019, aiming to strengthen group governance oversight, Board annual performance assessment, remuneration structure, conflict-of-interest management, and control, oversight and audit mechanisms; introduces a Board performance assessment. - Transitional/grandfathering measures in BOT Notification No FPG 10/2561 “Corporate Governance of Financial Institutions”: - The 9-year renewal requirement of independent directors will become effective on 1 May 2022. - Independent directors appointed before Clause 5.2.3. came into force are grandfathered until May 1, 2022. Seventy four percent of directors of locally incorporated banks are already in compliance with this requirement. - Clause 5.2.3. covers the 9-year director renewal period and the 2-year waiting period for taking up a position as independent director after being discharged from certain roles. - Clause 5.2.4 (2) limits number of appointments as director of companies listed on domestic and overseas stock exchanges to 5 for directors, managers, persons with power of management and advisors. All directors already in compliance. - Requirement for a risk oversight committee in accordance with Clause 5.4.2. comes into effect on May 1, 2019. - Five out of 15 domestic banks have already set up a risk oversight committee. - Two banks will establish 1 by December 2018 and the remaining 8 banks will be in full compliance by May 2019. - The 2-year waiting period for appointment as independent director after discharge is at the shorter end of the spectrum. - Pilot on behavior & culture (B&C) assessment in four large financial institutions noted as cutting edge practice. - Assessors recommend BOT incorporates regular meetings with independent directors as part of supervisory process to raise awareness of governance and risk culture. ### Risk management, capital adequacy and problem assets (CPs 15–18) - Risk management: - BOT supervisors assess policies, procedures and practices across risk categories in sufficient depth and scope. - Assessors recommend BOT publish best practice guides (for example after thematic reviews) to better articulate supervisory expectations and enhance international standing. - Capital adequacy: - BOT regulations reviewed for compliance with Basel standards; ICAAP and BOT assessment concluded thorough and consistent. - BOT discussed approval and application processes for advanced IRB and other modeling approaches. - BOT sets prudent and appropriate capital adequacy requirements that reflect market risks. Components of capital absorb losses and capital requirements are not less than the Basel standards. - Problem assets, provisions, and reserves: - Examinations were comprehensive and sufficient to cover implementation of BOT laws and regulations. - BOT ensures banks have adequate policies and processes for early identification and management of problem assets, and maintenance of adequate provisions and reserves. - Supervisors closely monitor asset quality at granular level for individual banks and system-wide; trends in cure rates and migration rates inform inspection intensity. - Provision coverage: - 140 percent (total provisions/total NPLs) - 170 percent (total provisions/required provisions) - BOT regulations and practices align with ECs of CP 18, but areas should be revised to align with Basel “Prudential Treatment of Problem Assets—Definitions of NPLs and Forbearance—April 2017”. - BOT issued revised Asset Classification. After TFRS 9 becomes effective in 2020: - Asset classification, provisioning and write off shall be in accordance with TFRS 9, considering economic, business, and financial conditions of debtors. - 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. - Revised regulation not in force at assessment date but likely to address most assessor recommendations. ### Concentration, related-party, country, market, liquidity, operational risks (CPs 19–26) - Concentration risk and large exposure limits: BOT supervisors review concentration risks adequately. - 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. Related transactions are closely monitored by BOT. - Country and transfer risks: Cross-border activities, including onsite presence, are increasing; examiners visit cross-border offices as warranted. - Market risk: Considered low and monitored on onsite and offsite activities. - Interest rate risk in banking book: No comments. - Liquidity risk: Monitored through gap analysis and mainly derived from deposits. - Operational risk: Examiners assess operational risk management framework comprehensively and in sufficient depth. - Internal control and audit: No comments. ### Financial reporting, disclosure and AML/CFT (CPs 27–29) - Financial reporting and external audit: - Thai accounting standards generally in line with IFRS at assessment date. - BOT's asset classification and provisioning standards for CL/PIL are more conservative than IAS 39. - Quantitative impact studies revealed 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. - Disclosure and transparency: No comments. - Abuse of financial services: - AML Act amended to strengthen requirements on banks. - Significant improvement in AML/CFT supervision regime. - MER identified gaps in AML/CFT standards that are in-process of being addressed. - Implement amendments to AMLA and Ministerial Regulation once approved by legislature (recommended action, Principle 29). ### Recommended actions (selected, by Principle) - Principle 1: - Where appropriate, 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: - Remove permanent inclusion of Director General of FPO from FIPC; consider adding in crisis times. - Remove Secretary-General of the Insurance Commission and Secretary-General of the Securities and Exchange from FIPC. - Formalize and enforce rotation policy for supervisory staff; rotate relationship managers after 3–5 years supervising same institution/banking group; establish a maximum period for any supervisor assigned to same institution. - 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. - Principle 9: - Augment emphasis on qualitative factors, such as adequacy of board policies and risk management, when evaluating bank condition. - Principle 11 (multiple actions): 1. Amend Guideline to advance PPA application prior to Weak bank status. 2. Align FIBA, Guideline and BOT operational views on application of FIBA Chapter 5. 3. Medium-term, work with MOF to narrow definition of public damage in FIBA to reflect actions for serious deterioration that may lead to possible resolution (such as a 5-rated bank), and that require MOF involvement. 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. - Principle 14: - Incorporate regular meetings with independent directors as part of supervisory process to raise awareness of governance and risk culture. - Principle 15: - Publish best practice guides (for example after thematic reviews) to better articulate supervisory expectations in areas such as risk management and governance. - Principle 16: - Build a more integrated approach towards Pillar 2; develop a methodology to set individual bank capital ratios as part of risk-based supervisory framework. - Principle 18: - Revise BOT regulations and practices to align with Basel “Prudential Treatment of Problem Assets—Definitions of NPLs and Forbearance—April 2017”, including: - Require banks to include a list of indicators to determine qualitative criterion of unlikeliness to pay in their policies. - Align BOT definition of restructuring and rescheduling with forbearance definition in international good practice; refer to financial difficulty of borrower and not be conditional on bank making a loss. - Change probation period for non-performing restructured exposures from 3 months to at least 1 year. - Prohibit upgrade of exposure when restructuring is granted; upgrades only after successful completion of probation period. - Provide more detailed guidance on level of application of asset classification (borrower or transaction level). - Principle 21: - Enhance country risk manual with best practice 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. *Source: 2. Independence, accountability, resourcing and legal protection for supervisors (Thailand assessment).* ### 54. The Thai authorities appreciate the comprehensive and positive assessments and the ### The Thai authorities appreciate the comprehensive and positive assessments and the constructive dialogues during the FSAP mission ### Institutional arrangement and FIPC composition - The FIPC members consist of "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." - "The three representatives from MOF and other regulatory agencies are outnumbered by external experts." - The current institutional arrangement was "purposely designed based on our experiences, particularly by drawing upon lessons learned during the 1997 financial crisis." - The authorities' view: "there are merits to each institutional arrangement design and there is no one-size-fits-all in this matter, but rather a ‘best suited’ one, tailored to the jurisdiction’s context and shaped through experiences." - The institution framework has been "practical and effective, suitable for Thailand’s context, while not compromising the independence of the BOT as the bank regulator." ### Interconnectedness of banking, securities and insurance sectors; role of MOF and other agencies - "With the increased interconnectedness among banking, securities and insurance sectors, the MOF and other financial regulatory agencies’ participation in the decision-making process of the FIPC are useful in ensuring an effective oversight of financial stability." - Benefits of participation listed: - "timely engagement of the authorities to promote effective and efficient coordination in policy-making and crisis management." - "appropriate check and balance and due consideration of overall economy and financial stability." - "capitalization on synergy among authorities and harmonization of regulations across sectors through cross-directorships with appropriate arrangement to safeguard operational independence. This model should support policy harmonization better than a consulting forum." - Challenge noted: "In the complex financial landscape, it became rather challenging to find a knowledgeable and well-experienced individuals to serve in the FIPC that have no involvement in the financial sector and no conflict of interest." ### Macroprudential policy, MPC, and complementarities with monetary policy - Authorities' view: "macroprudential policy decision should not be the sole responsibility of the FIPC, but should also involve the MPC in order to have a holistic macroeconomic view and can deploy other policy tools to help safeguard the overall financial stability." - Mandates: "The mandates of MPC and FIPC are stipulated in the BOT Act, for which the primary objective of the MPC is price stability and that of the FIPC is financial institution system stability." - Policy rationale: "Effective policy decisions could leverage on the complementarity between monetary and macroprudential policies, while separating monetary policy and financial stability decisions could be sub-optimal." ### Accountability, transparency, and engagement - Measures to assure FIPC accountability include: - "submitting the biannual report to the cabinet through the Finance Minister as required by the BOT Act," - "disseminating data to the public," - "engaging with third party/independent stakeholders on performance evaluation of the Committee." - Additional engagement: "the BOT has actively engaged with the committees and subcommittees under national legislative body who oversee economic and financial stability and policy issues." ### Supervision of SFIs (Specialized Financial Institutions) - "SFIs supervisory framework is undergoing a major reform with an aim to implement supervisory standards for deposit-taking SFIs in a comparable manner to commercial banks." - Since "2015, the BOT has strengthened the supervisory and regulatory actions of SFIs in various aspects, such as governance, credit process, accounting and information disclosure, etc." - Examination and reporting process: "SFI examination results have to go through the BOT subcommittee. The final examination report will be submitted to both the MOF and SFI’s Board." - Regulatory formulation: "the regulatory formulation process for SFIs is separated from that of commercial banks, whereby the draft of SFIs regulations are reported to FIPC only for acknowledgement before submitting to the MOF for approval." - Authorities agree with continuing reforms but stress that reform efforts should take into account: - "(1) the SFIs' respective mandates to fulfill financial gap and foster economic development;" - "(2) capability and readiness of the SFIs; and" - "(3) mutual understanding/agreement among relevant authorities." ### Inter-agency cooperation: 3-Regulator Steering Committee (3RSC) and crisis preparedness - Existing coordination platform: "an existing 3-Regulator Steering Committee (3RSC) serves as a platform for regular exchange of information and coordination in respect of all financial sector surveillance and regulatory policy issues." - Composition: "3RSC has been established as a non-statutory body outside of the BOT, comprising the BOT Governor, the SEC, and the OIC Secretary-Generals as well as high-level executives of these regulatory agencies." - Meeting frequency and participation: "The 3RSC meets at least quarterly to discuss policy-related issues, share information, and coordinate their regulatory policies. The MOF also attends the 3RSC meeting on a regular basis." - Crisis preparedness: "The newly established 3RSC working group on crisis preparedness includes other relevant agencies such as DPA and FIDF." - Ongoing consideration: "Currently, the Thai authorities are discussing the possibility of setting up an overarching and advisory body with respect to financial stability risks." ### Action plan, timelines, and regulatory changes - Authorities welcome assessors’ recommendations and note alignment with their action plan, including: - "enhancing clarity of internal guidelines for preventive actions, PPA/PCA" - "revising regulation on asset classification to be implemented in 2020 once IFRS 9 becomes effective." - Commitment: "We aim to continue to strengthen our supervisory framework in line with international best practice, and to further promote stability and development of the banking sector in Thailand." *Source: Excerpt from Thai authorities’ response in IMF FSAP chapter.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1thaea2019004.pdf_