## EXECUTIVE SUMMARY

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### I. Current Macroeconomic and Financial Environment
- Significant reforms since the 1997 financial crisis have strengthened soundness and resilience of the Thailand financial sector.
- Macroeconomic management improvements:
  - Implementation of a fiscal sustainability framework.
  - Adoption of a floating exchange rate regime and inflation targeting.
  - Enhanced monetary transparency.
- Corporate sector: corporations have significantly deleveraged and upgraded governance practices.
- Domestic capital markets have developed over the past decade, partly in response to large funding needs of the government and banks after the crisis.
- Recent market developments:
  - Banks and other financial institutions remained resilient amid turmoil in mature credit markets and heightened market volatility.
  - Stock Exchange of Thailand (SET) rose strongly in 2007, recovering prior losses.

### II. Banking Stability
- Banking fundamentals strengthened:
  - Banks’ risk adjusted capital adequacy ratio averaged 15 percent at end-2007, well above the regulatory minimum of 8½ percent.
  - Operating profitability improved for most banks due to higher interest margins and strong loan growth.
  - Two weaker banks recapitalized; one is in the process of being privatized.
- Reduced overall risk profile due to better credit underwriting and BOT efforts to improve provisioning coverage against distressed assets.
- Stress test results and vulnerabilities:
  - Banks are vulnerable to a sharp domestic economic slowdown, primarily from credit risk, reflecting large holdings of loans on balance sheets.
  - Liquidity risk was material for a few banks, notwithstanding current high liquidity in the banking system.
  - Market and contagion risks were more modest, reflecting limited holdings of securities, use of hedging instruments, and low interbank and international exposure.
- Legacy problems and supervisory priorities:
  - Need to reduce high levels of nonperforming loans (NPLs) and nonperforming assets (NPAs) in banks and state-owned AMCs.
  - Continued and close supervisory attention to weaker banks.
  - Strengthen credit culture to facilitate more effective and quicker action against defaulted borrowers.
  - Move ahead with planned intention to introduce a limited deposit insurance scheme to reduce moral hazard associated with a blanket deposit guarantee.

### III. Regulatory and Supervisory Framework
- Overall observance: Thailand generally shows a high level of observance of international financial sector standards and codes.
- Key structural weaknesses:
  - Effectiveness potentially undermined by a weak legal underpinning and insufficient de jure independence.
  - Slow progress on measures requiring government action.
- Priority legal reforms and actions:
  - Passage of stalled legal reforms should be high priority, including giving the BOT full authority to regulate, supervise, and take enforcement actions with respect to BOT-supervised deposit-taking institutions.
  - Amend current laws to include appropriate procedures for appointment and dismissal of heads of supervisory agencies, with fixed terms and objective safeguards.
  - Grant the BOT explicit legal authority to perform consolidated supervision.
- Insurance sector:
  - Appears sound and profitable but regulatory and supervisory framework needs upgrading.
  - High priority reforms:
    - Establish a new, independent supervisory agency (Office of the Insurance Commission Act passed August 2007).
    - Move gradually toward risk-based supervision and solvency capital regimes.
    - Introduce a policy-holder protection scheme.
    - Undertake stress testing to assess sector vulnerabilities.
- Regulatory coordination:
  - Enhance coordination through more timely information sharing, collaboration on proposed regulatory and policy changes at the staff working level, and greater consultations with market participants.

### IV. Crisis Management, Bank Resolution, and Safety Net
- Government role and ownership:
  - Government equity stakes in deposit-taking SFIs and in several private commercial banks create the appearance of an unlevel playing field and selective regulatory forbearance.
  - Recommendation to re-evaluate government’s considerable role and reduce its equity stake in private financial institutions; develop a comprehensive medium-term strategy clarifying roles of private commercial banks, government-owned commercial banks, and SFIs.
  - If SFIs take deposits, they should be regulated and supervised like commercial banks.
- Financial safety net:
  - Transition from a blanket guarantee to a limited deposit insurance system recommended to reduce moral hazard.

### V. Financial Market Integrity and Infrastructure
- Payment and securities settlement systems:
  - Address systemic risks in payment and securities settlement systems.
  - Finality of settlement of interbank transactions should not be subject to challenge in the event of bankruptcy.
  - SEC and Thailand Securities Depository Company Co., Ltd. (TSD) should have authority and capacity to respond to financial failures by market participants.
  - Recommend legal separation of the Central Securities Depository (CSD) and the Central Counterparty (CCP) functions.
- AML/CFT framework:
  - Bring Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework in line with the FATF 40+9 Recommendations.
  - Anti-Money Laundering Act 1999 (AMLA) will need to be amended.
  - Effective mechanisms needed to implement and monitor Thailand’s AML/CFT regime.

### Key FSAP Recommendations (Box 1)
- Supervisory regime (Immediate priority; Medium-term priority):
  - Passage of pending legal reforms to establish legal independence of supervisory agencies and objective dismissal standards.
  - Strengthen insurance supervision by establishing an independent supervisory board and moving to risk-based supervision and capital regimes.
  - Improve coordination among supervisory agencies through regular consultations and greater sharing of draft policies and regulations at the staff level; improve consultations with market participants.
- Financial safety net framework (Immediate priority):
  - Transition from a blanket guarantee to a limited deposit insurance system.
- Central bank independence and transparency (Immediate priority):
  - Assure full legal and operational independence of the BOT in the conduct of monetary policy.
  - Clarify in the BOT Act the primary objectives of monetary policy.
- Role of the government in the banking sector (Medium-term priority):
  - Gradually reduce the government’s equity stakes in private commercial banks.
  - Re-evaluate appropriateness of SFIs taking deposits and ensure SFIs are regulated and supervised like commercial banks if they do.
- Distressed asset resolution (Immediate and Medium-term priorities):
  - Reduce the large stock of NPLs and distressed assets in the financial sector and state-owned AMCs.
  - Accurately identify and monitor the level and aging of NPLs in banks.
  - Address legal infrastructure weaknesses, including banks’ ability to seize collateral.
  - Provide tax incentives for writing off NPLs.
- Financial infrastructure and integrity:
  - Amend the AMLA to align with international standards.
  - Amend laws to protect finality of interbank settlement in bankruptcy and reduce systemic risks in securities settlement.
  - Legally separate CSD and CCP functions.

*Source: Executive Summary, _cr09147 - Executive Summary.*

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### Box 2 — Recent legal and institutional reforms (selected items)
- Overview:
  - Bulk of critical legal financial sector reforms passed in December 2007.
  - Amended BOT Act and amended Securities and Exchange Act came into effect since March 2008 (except sections related to the Deposit Protection Agency Act effective August 2008).
  - Financial Institutions Business Act (FIBA) and Deposit Protection Agency (DPA) Act to go into effect August 2008.
  - Office of Insurance Commission Act passed August 2007.
- Amendments to the BOT Act:
  - Objectives explicitly spelled out: achieve monetary stability, payment system stability and financial stability.
  - BOT has full operational independence to achieve monetary objectives; no longer must receive MOF approval for new issuance of its own bills for liquidity management; BOT can pay interest on banks’ uncollateralized deposits held at the BOT.
  - Selection and dismissal of BOT governor and terms defined; transparency enhanced.
- Financial Institutions Business Act (FIBA):
  - Makes BOT sole regulator of commercial banks; BOT can close an institution; BOT granted right to conduct consolidated supervision and an explicitly anchored prompt correction action framework.
- Deposit Protection Agency (DPA) Act:
  - Blanket deposit guarantee replaced with limited deposit insurance.
  - New scheme effective August 11, 2008, phased in over 5 years: first year full coverage then gradually reduced to B 1 million (equivalent to about US$33,000 at current exchange rate).
  - Initial capital of B 1 billion funded by government; DPA to act as liquidator for failed/closed financial institutions.
- Office of Insurance Commission Act:
  - Introduces an independent regulator; movement toward risk-based capital regimes and International Accounting Standards (IAIS Insurance Core Principles).
- Securities and Exchange Act:
  - Gives SEC power to provide information/assistance to foreign capital market regulators; SEC and Thailand Securities Deposit Corporation given authority to act when a licensed broker fails; MOF no longer appointed Chairman of SEC Board.

*Source: Box 2 (IMF staff).*

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### 10. Considerable efforts have also been made to strengthen banks’ capital position

### Capital position and risk management
- Revisions to loan loss provisioning guidelines to comply fully with IAS by end-2007 led to higher provisioning charges for the banking system as a whole.
- BOT adopted a conservative approach to Basel II implementation, expected at the end of 2008; most banks intend to adopt the standardized approach.
- A few large and mid-sized banks still have low loan loss coverage.

### Banking stability — overall assessment and distressed assets
- Despite improvements, banks remain exposed to large holdings of NPAs and restructured loans.
- Total NPLs among banks amounted to 7.3 percent of total loans at end-2007, down from 8.3 percent in 2005.
- Gross distressed assets in banks and AMCs amounted to B 1.5 trillion at end-2007, or 17.5 percent of GDP.
- NPLs reflect mainly bad debts not written off for legal and tax reasons.
- As of 2006 level of distressed bank assets:
  - NPLs Baht 440 bn
  - Restructured loans Baht 481 bn
  - Other NPAs Baht 241 bn

### Restructured loans and measurement caveats
- BOT does not collect or monitor the stock of restructured loans on a regular basis; 2006 information was from a BOT survey.
- As of end-2006, restructured loans amounted to 5.7 percent of total bank loans.
- On average, about 14 percent of such loans reenter into nonperforming status.
- No updated data on restructured loans for 2007.

### Credit ratings and risk perception (2007 signals)
- Fitch’s Banking System Index: C/D rating
- Moody’s Bank Financial Strength Rating (BFSR): individual D ratings
- Standard and Poor’s Banking Industry Country Risk Assessment (BICRA): Group 6 (scale of 1–10 with 1 the highest)
- 2007 ratings of six largest commercial banks (as presented):
  - Bangkok Bank (BBL): Moody's Long term deposits Baa1, BSFR Individual D+, Fitch Long term Foreign Issuer BBB+, Outlook Stable.
  - Krung Thai Bank (KTB): Moody's Baa1, BSFR Individual D-, Fitch BBB, Outlook Stable.
  - Siam Commercial Bank (SCB): Moody's Baa1, BSFR Individual D+, Fitch BBB, Outlook Stable.
  - Kasikornbank (Kbank): Moody's Baa1, BSFR Individual D+, Fitch BBB, Outlook Stable.
  - TMB: Moody's Baa2, BSFR Individual D-, Fitch BB+, Outlook Negative.
  - Bank of Ayudhya (BAY): Moody's Baa3, BSFR Individual D-, Fitch BBB-, Outlook Positive.

### Causes of slow progress on legacy NPLs
- Weak credit culture and weak creditor rights, cumbersome restructuring and foreclosure processes, tax disincentives for write-offs, and gaps in regulatory treatment of restructured loans.
- Political economy factors: slow progress may reflect political clout of family-owned corporates, impeding conversion of debt into equity and legal reforms (Bankruptcy Act, Civil Procedure Code).
- Consequences: reduced value of NPLs, discouraging banks from selling at market value, weakening credit culture, protracted bankruptcy reducing economic value.

### Policy recommendations to address NPAs and prevent recurrence
- BOT measures and supervisory actions:
  - Full implementation of IAS 39.
  - Strengthen supervisory program to hold bank management fully accountable for identifying distressed assets.
  - Maintain conservative guidelines on restructured loans, e.g., require performance for at least three payment periods before reclassification.
- Government legal and tax reforms:
  - Expedite foreclosure processes, enhance effectiveness of specialized bankruptcy court, adopt liquidity test for troubled debtors.
  - Reform tax regulations to permit prompt recognition of losses for tax purposes.
- State-Owned AMCs:
  - Require acceleration of distressed asset disposal with aggressive, objective benchmarks and realistic valuation guidelines.
  - Develop realistic exit strategy for AMCs.
  - Note: closure of FIDF postponed from 2009 to 2013; TAMC by law to wind down by end-2011; no such clauses for other AMCs.
- State ownership and bank divestiture:
  - Continue divestiture program of equity stakes in recapitalized commercial banks; develop and implement exit strategy from government ownership.
  - Ensure state-owned banks subject to same regulatory treatment regarding external auditors and insulated from political interference; consider full privatization over time.

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### Stress test results and implications (summary)
- Scope: BOT, mission, and eight largest commercial banks (accounting for 88 percent of banking system assets at end-2006); single-factor and macroeconomic scenario analysis.
- Key findings:
  - Banking system generally resilient but weaker banks require continued supervisory attention.
  - Credit risk is main source of vulnerability; loans account for about half of banking assets, bulk extended to corporates.
  - Under two shock scenarios, NPLs as percent of total loans would approximately double over a two-year horizon.
  - Banks accounting for about one-fifth of total banking assets would fall below BOT’s minimum CAR.
  - Liquidity risk material for a few banks despite high system-wide liquidity.
  - Interest rate risks on banking book were contained; only one small bank reported significant regulatory capital impact.
  - Market risks had minor impact due to small trading portfolios and hedging.
  - Contagion risks through interbank and international markets were negligible due to very small interbank exposures and reduced international credit exposure; banks rely mainly on retail deposits for funding.
- Coverage gaps: stress tests for banks’ exposure to the housing market and some larger deposit-taking SFIs (e.g., Government Housing Bank) could not be conducted due to insufficient supervisory financial information.

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### Banking supervision, legal framework, and governance (selected findings and recommendations)
- Finding: High degree of compliance with international standards, but effectiveness threatened by outdated legal framework and absence of formal legal independence.
- Finding: Responsibility for banking supervision shared between MOF and BOT; BOT formally lacks full and independent enforcement capabilities.
- Risks and recommendations:
  - Legal subordination of BOT to MOF could lead to interference or delay in regulatory action; propose expeditious passage and implementation of pending draft laws to provide BOT operational independence.
  - Amend laws to provide objective safeguards regarding appointment and dismissal of supervisory heads; require public disclosure of dismissal reasons.
  - Grant BOT legal powers to conduct consolidated supervision over banks’ exposures to insurance or securities businesses.
  - Address conflict of interest where BOT is involved in management/ownership functions via FIDF; reduce appearance of conflict where BOT supervises banks in which it is involved as owner/manager.
  - If SFIs continue to take deposits, they should be supervised same as commercial banks by BOT.
  - Implement prompt preventive action (PPA) and prompt corrective action (PCA) frameworks; PCA awaiting MOF approval.
  - Remove blanket deposit guarantee and put in place limited deposit protection with enhanced bank resolution tools.

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### Banking fundamentals and Basel Core Principles (selected statistics and recommended actions)
- Key statistics:
  - Average capital-to-risk weighted assets ratio: 14 percent at end-2006.
  - Gross NPL ratio: about 7.5 percent.
  - Loan loss coverage ratio: 70 percent as of end-2006.
  - Average rate of reentry of restructured loans into NPL category: 14 percent.
- Main recommended action points (selected):
  - Grant BOT legal authority to issue regulation, conduct supervision, and take enforcement actions without Minister approval.
  - Amend laws to enable SFIs taking public deposits to be regulated and supervised as banks by BOT.
  - Ensure adequate capital during transition to Basel II (Basel II to be fully implemented in 2008).
  - Strengthen regulations on loan restructuring to prevent high reentry rates to NPL status.
  - Require external auditors to report material findings to Board and BOT immediately; align external audit oversight across state and private banks.

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### Role and oversight of State Financial Institutions (SFIs)
- Role and mandate:
  - SFIs provide financial services to low–income households, farmers and infant SMEs; overlap with commercial banks is viewed as "insignificant."
  - SFIs lend concessional small loans (example: Government Housing Bank — 90 percent of GHB lending portfolio is loans that are less than B 1 million).
- Deposit-taking SFIs: Government Housing Bank (GHB), Bank for Agriculture and Agricultural Cooperatives, Government Savings Bank (GSB).
- MOF role:
  - MOF supervises SFIs under special supervisory framework; MOF delegated examinations to BOT but retains overall supervision.
- Fiscal and remittance treatment:
  - SFIs exempted from corporate income tax (30 percent), specific business tax (3.3 percent) and stamp duties.
  - GSB, GHB and EXIM required to remit "35–45 percent of their profit to the MOF."
- SFI remittance figures (Table 7):
  - GSB FY2006: 6,000.00 (Million Baht); FY2007: 6,557.06 (Million Baht); Remittance Ratio* FY2006: 59.20; FY2007: 57.12.
  - GHB FY2006: 1,893.00 (Million Baht); FY2007: 1,988.6 (Million Baht); Remittance Ratio* FY2006: 41.50; FY2007: 41.38.
  - EXIM FY2006: 161 (Million Baht); FY2007: 200.45 (Million Baht); Remittance Ratio* FY2006: 30.64; FY2007: 33.48.
  - Total FY2006: 8,054.00 (Million Baht); FY2007: 8,746.11 (Million Baht).
  - Note: "*Remittance Ration - % of profit remitted to MOF."

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### Securities market and capital markets regulation (selected findings and recommendations)
- Market facts:
  - 518 listed companies on SET; total market capitalization approximately B 5 billion (as of December 2006).
  - Equity market characteristics: total market capitalization equivalent to 75 percent of GDP at end-2006 (elsewhere cited as US$112 billion equivalent to 51 percent of GDP at end-2006); heavy concentration with ten largest companies accounting for approximately 40 percent of market cap; retail investors account for over 55 percent of daily trading; typical P/E ratio less than 10.
  - Mutual funds: as of December 2006, 18 asset management companies managing 807 mutual funds, total assets approximately B 1,222.5 billion.
  - Debt market: corporate debt market approx. B 1 trillion; daily trading less than 3 percent of total.
- Regulatory recommendations for SEC and market infrastructure:
  - Create formal coordination mechanism among governmental agencies with regulatory authority over capital markets.
  - Transfer final licensing authority for securities firms and mutual fund administrators to SEC; confirm Minister of Finance does not have authority over daily SEC operations.
  - Amend SEA to enable SEC to independently file civil enforcement actions, impose monetary penalties, and clarify legal definitions for insider trading and market manipulation.
  - Empower SEC to appoint liquidator/receiver to protect customer accounts of failing securities firms; address bankruptcy protection for customer assets.
  - Remove restriction requiring new securities dealers to purchase existing licenses.

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### Payment and securities settlement systems (BAHTNET and TSD) — key findings and actions
- Payment systems oversight:
  - BOT agreed with assessment; BAHTNET review concluded professionally.
  - Bankruptcy Law amendment in process to ensure BAHTNET transactions cannot be revoked in participant insolvency.
  - BOT implementing payment systems oversight and formalizing methodology.
- TSD (CSD and CCP) assessment highlights:
  - System largely sound, efficient and reliable but essential measures needed: strengthen legal soundness, governance, communication network, and transparency.
  - Key concerns:
    - Netting arrangements should be legally valid in participant bankruptcy.
    - Settlement and depository functions need protection from CCP credit/liquidity risk.
    - Potential conflict of interest between CCP and CSD functions; recommend legal separation.
    - TSD should refrain from allowing debit balances of securities; implement same-day buy-in and same-day settlement upon participant failure.
    - TSD settlement and custody fees are bundled into SET fees; TSD should have its own pricing structure and unbundle fees.
    - SEC and BOT oversight roles need clarification; SEC lacks legal power to directly regulate TSD; proposed SEA amendment pending National Assembly to empower SEC to directly regulate TSD.
- Institutional statistics:
  - Equity market size: US$112 billion at end-2006; number of listed companies: 518; annual turnover value 2006: US$111 billion.
  - Outstanding government bonds and bills at end-2006: US$41.45 billion (18.81 percent of GDP); government bills US$6.43 billion (2.92 percent of GDP).
  - Total trading value at 2006 year-end: US$120 billion with average daily trading value of US$496 million.

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### FSAP assessment of securities settlement system (paragraph 131)
- Assessment against CPSS/IOSCO recommendations reflects a highly satisfactory level of compliance.
- Major weaknesses identified: SEC supervisory power coverage over TSD and efficiency in TSD’s risk management and operations.
- Actions committed:
  - TSD committed to abolish debit balances and implement same-day buy-in and same-day settlement facility by end of this year.
  - SEC requesting IMF technical assistance to study separation of CCP from depository function.
  - TSD reviewing cost structure and unbundling fees.
  - Draft SEA amendment passed Council of State scrutiny and pending National Assembly to give SEC direct power to regulate TSD.

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### F. AML/CFT assessment — summary findings and prioritized recommendations
- Assessment scope: AML/CFT Methodology 2004; mission February 26–March 13, 2007; Detailed Assessment Report (DAR) approved by Asia-Pacific Group (APG).
- Executive summary — key findings:
  - Thailand introduced measures to strengthen AML/CFT, particularly CFT.
  - Regime produced a very large number of STRs and substantial asset seizures.
  - Legislative and operational shortcomings remain; AMLA 1999 needs amendment to align with FATF 40+9.
- Estimates and vulnerabilities:
  - Illegal economy estimated up to 13 percent of GDP.
  - ML predicate offenses estimated to generate illicit proceeds up to five percent of GDP.
  - Informal sector estimated up to 53 percent of GDP.
- Core AMLA features and weaknesses:
  - AMLA criminalizes ML by reference to eight predicate offenses, establishes AMLO as FIU, imposes some CDD obligations, requires reporting to AMLO, and creates civil seizure process.
  - Weaknesses: AMLA does not fully criminalize ML to FATF standard; AMLO disseminates few reports to LEAs; AMLO under-resourced and operationally focused on civil vesting rather than analysis for prosecution.
- Asset seizure and prosecution statistics:
  - Total asset seizures since 1999 exceed US$250 million.
  - AMLO has seized approximately US$30 million per year and secured permanent vesting of approximately US$14 million per year.
  - On average Thailand prosecutes just eight ML cases each year, obtaining convictions for three.
- TF (terrorist financing):
  - TF criminalized under Penal Code and a predicate for ML under AMLA, but not fully in line with international standards; Penal Code TF offense needs amendment to extend coverage and increase sanctions; no TF prosecutions to date.
- Preventive measures and reporting:
  - Reporting thresholds: cash transactions over B 2 million (US$52,800); transactions connected with property worth more than B 5 million (US$132,000); suspicious transactions regardless of amount.
  - Reporting system yields approximately 40,000 STRs each year, almost all from banks.
  - Deficiencies: customer identification not extending to beneficial ownership; no obligation for ongoing due diligence; high reporting thresholds (B 2 million) exceed FATF benchmark and cannot be justified relative to average Thailand income of US$3,000.
  - AMLA does not apply to all FIs (excludes authorized money transfer agents); DNFBPs not covered.
- Supervisory and enforcement issues:
  - No clear designation of competent authorities for ensuring FI compliance with AMLA; BOT and SEC carry out effective monitoring for supervised FIs but enabling legislation complicates sanctions.
  - Recommendations include amending AMLA to delineate AMLO and supervisors’ roles, provide powers for compliance examinations, issue guidance, impose sanctions (including criminal in severe cases), and establish MOUs for coordination.
- Prioritized recommendations (selected, by theme):
  - Extend predicate offences in AMLA to cover all serious offences per FATF.
  - Amend Penal Code to align TF offense with UN TF Convention and broaden scope.
  - Amend AMLA to empower AMLO to disseminate analysis to competent authorities and improve STR analysis capacity.
  - Lower reporting thresholds and expand CDD and STR obligations to all FIs and relevant DNFBPs.
  - Improve statistics, training, awareness, and international cooperation; ratify Palermo Convention and implement UN TF Convention obligations.
- Authorities’ response:
  - Authorities are proceeding to extend predicate offenses, abolish AMLO reward system and set up Asset Fund, and entering MOUs with foreign FIUs (31 MOUs as of July 17, 2007).

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### 161. Summary assessment and follow-up (DAR)
- DAR conclusion: good intentions and efforts by authorities to achieve FATF 40+9 compliance, but full compliance contingent on amending operating legislation.
- Prioritized recommendations organized by legal system, FI preventive measures, DNFBPs, legal persons and NPOs, national and international cooperation, and resources/statistics.
- Authorities indicate ongoing legislative and operational steps to address many DAR recommendations.

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### APPENDIX II — STRESS TESTS (detailed design and selected results)
- Objective: assess resilience of banking system to severe but plausible shocks.
- Scope: eight largest commercial banks, accounting for 88 percent of banking assets at end-2006.
- Single-factor shocks:
  - Market risk shocks calibrated using 99 percentile of historical distribution with a 10-day holding period.
  - Interest-rate risk on banking book calibrated using ninety-ninth percentile with a one-year holding period.
- Selected single-factor impact examples (interest-rate risk on banking book, impact on CAR):
  - THB yield curve +250 / +250 / +250 → -2.73 (impact on CAR, percent).
  - THB yield curve -200 / -200 / -200 → 1.56.
  - THB yield curve +75 / +150 / +300 → -2.21.
- Market risk single-factor examples (average impact on CAR, percent):
  - THB yield curve +75 / +75 / +75 → -0.04.
  - SET Decline → 200.00 (impact on CAR, percent).
  - USD Depreciation → 90.00 (impact on CAR, percent).
- Liquidity stress scenarios (deposit loss assumptions and haircuts):
  - Scenario 1 deposit losses (percent): Retail (1–7 days) 10; Retail (8 days–1 month) 15; Wholesale 30.
  - Scenario 2 adds interbank market access limit (50% of committed lines), no access to uncommitted lines, and asset haircuts (e.g., T-bill 3, Govt. & BoT 5, Corporate Debt (listed) 20, Corporate Debt (non listed) 40, Stock (SET 50) 20, Other Instruments 100).
  - Scenario results (Net liquidity position / deposits, percent): Scenario 1 Average 15.9; Scenario 2 Average 3.3.
- Macroeconomic scenarios (two scenarios with BOT projections):
  - Scenario 1 (external event — U.S. recession comparable to 2001 impact):
    - BOT projections under Scenario 1 (selected):
      - GDP → 2007: 2.0; 2008: 3.0.
      - Domestic demand → 2007: 2.4; 2008: 3.8.
      - Exports → 2007: 1.0; 2008: 0.6.
      - Exchange rate (eop) THB/USD → 2007: 33.4; 2008: 33.1.
      - Repo rate (1 day) → 2007: 2.8; 2008: 1.8.
    - Under Scenario 1, Thailand’s real GDP growth projected to fall to 2 percent in 2007, recover to 3 percent in 2008 and to 5 percent in 2009; severity corresponds around ninety-fifth percentile of real GDP distribution.
  - Scenario 2 (domestic policy and political uncertainty shock):
    - BOT projections under Scenario 2 (selected):
      - GDP → 2007: 2.0; 2008: 4.0.
      - Exchange rate (eop) THB/USD → 2007: 35.2; 2008: 35.1.
      - Repo rate (1 day) → 2007: 2.8; 2008: 1.8.
- Macro scenario stress-test results (CARNPL projections, percent):
  - Top-down Scenario 1 (assuming zero operating profits): 2008 17.6 (CARNPL).
  - Top-down Scenario 2 (assuming nonzero operating profits): 2008 17.0 (CARNPL).
  - Bottom-up Scenario 1 (assuming nonzero operating profits): 2008 15.3 (CARNPL).
- Bank-sector indicators and key statistics (selected entries from Table 22):
  - Regulatory capital as percent of risk-weighted assets* → 2007: 15.0 (also 2006: 14.1; 2005: 13.9; 2004: 13.0; 2003: 14.0; 2002: 13.6).
  - Regulatory Tier I capital to risk-weighted assets* → 2007: 12.4; 2006: 11.6; 2005: 11.0.
  - Capital as percent of assets* → 2007: 10.5; 2006: 9.9.
  - Non-performing loans (NPL) as percent of gross loans* → 2007: 7.3; 2006: 7.5; 2005: 8.3; 2004: 10.9; 2003: 12.9; 2002: 15.7.
  - Provisions + write-offs as percent of NPL → 2007: 81.4; 2006: 77.1; 2005: 77.7.
  - NPL net of provisions as percent of tier I capital* → 2007: 16.6; 2006: 19.0.
  - Liquid assets as percent of total assets* → 2007: 20.3; 2006: 18.4.
  - Deposits as percent of assets → 2007: 73.7; 2006: 76.5.
  - Loans as percent of deposits* → 2007: 93.9; 2006: 89.0.
  - Net profits as percent of average assets (ROAA) * → 2007: 0.3; 2006: 0.8; 2005: 1.4; 2004: 1.3.
  - Net profits as percent of average equity capital (ROAE) * → 2007: 2.7; 2006: 7.1; 2005: 12.1; 2004: 13.3.
  - Bank domestic credit (billion baht) → 2007: 6,038.3; 2006: 5,738.4.
  - Consumer loans (billion baht) → 2007: 1,409.9; 2006: 1,181.5.
  - Number of employees → 2007: 111,128; 2006: 105,804.
  - Number of branches → 2007: 5,054; 2006: 4,711.

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*Source: IMF FSAP chapter/section as provided in content unit _cr09147.*

### Executive Summary ......................................................................................................

### EXECUTIVE SUMMARY

### I. Current Macroeconomic and Financial Environment
- Significant reforms since the 1997 financial crisis have strengthened soundness and resilience of the Thailand financial sector (Appendix I).
- Macroeconomic management improvements:
  - Implementation of a fiscal sustainability framework.
  - Adoption of a floating exchange rate regime and inflation targeting.
  - Enhanced monetary transparency.
- Corporate sector:
  - Thailand corporations have significantly deleveraged and upgraded governance practices.
- Domestic capital markets have developed over the past decade, partly in response to large funding needs of the government and banks after the crisis, strengthening financial system resilience.
- Recent market developments:
  - Banks and other financial institutions remained resilient amid turmoil in mature credit markets and heightened market volatility.
  - The Stock Exchange of Thailand (SET) rose strongly in 2007, recovering prior losses.

### II. Banking Stability
- Banking fundamentals strengthened:
  - Banks’ risk adjusted capital adequacy ratio averaged 15 percent at end-2007, well above the regulatory minimum of 8½ percent.
  - Operating profitability improved for most banks due to higher interest margins and strong loan growth.
  - Two weaker banks recapitalized; one is in the process of being privatized.
- Reduced overall risk profile due to better credit underwriting and BOT efforts to improve provisioning coverage against distressed assets.
- Stress test results and vulnerabilities:
  - Stress tests show banks are vulnerable to a sharp domestic economic slowdown, primarily from credit risk, reflecting banks’ large holdings of loans on their balance sheet.
  - Liquidity risk was material for a few banks, notwithstanding current high liquidity in the banking system.
  - Market and contagion risks were more modest, reflecting limited holdings of securities, use of hedging instruments, and low interbank and international exposure.
- Remaining legacy problems and supervisory priorities:
  - Need to reduce the high level of nonperforming loans (NPLs) and nonperforming assets (NPAs) in the financial system (in both banks and state-owned asset management companies (AMCs)).
  - Continued and close supervisory attention to weaker banks is needed.
  - Strengthen credit culture to facilitate more effective and quicker action against defaulted borrowers.
  - Authorities should move ahead with planned intention to introduce a limited deposit insurance scheme to reduce moral hazard associated with a blanket deposit guarantee (see Box 1).

### III. Regulatory and Supervisory Framework
- Overall observance:
  - Thailand generally shows a high level of observance of international financial sector standards and codes.
- Key structural weaknesses:
  - Effectiveness of the current supervisory and regulatory framework is potentially undermined by a weak legal underpinning and insufficient de jure independence.
  - Many problems identified earlier remain unresolved, with slow progress especially on measures requiring government action.
- Priority legal reforms:
  - Passage of stalled legal reforms should be high priority, including giving the BOT full authority to regulate, supervise, and take enforcement actions with respect to BOT-supervised deposit-taking institutions.
  - Since the FSAP, several important financial sector laws were passed (Box 2).
- Insurance sector:
  - Appears sound and profitable, but regulatory and supervisory framework needs upgrading.
  - High priority reforms for insurance:
    - Establish a new, independent supervisory agency.
    - Move gradually toward risk-based supervision and solvency capital regimes.
    - Introduce a policy-holder protection scheme.
    - Undertake stress testing to comprehensively assess sector vulnerabilities.
- Regulatory coordination:
  - As differences among banking, insurance, and securities sectors blur, effective coordination among financial regulators is crucial.
  - Enhance coordination through more timely information sharing, collaboration on proposed regulatory and policy changes at the staff working level, and greater consultations with market participants.

### IV. Crisis Management, Bank Resolution, and Safety Net
- Government role and ownership:
  - Government equity stakes in deposit-taking SFIs and in several private commercial banks have created the appearance of an unlevel playing field and selective regulatory forbearance.
  - Recommendation to re-evaluate government’s considerable role and reduce its equity stake in private financial institutions.
  - Develop a comprehensive, medium-term strategy clarifying roles of private commercial banks, government-owned commercial banks, and SFIs.
  - If SFIs take deposits, they should be regulated and supervised like commercial banks.
- Financial safety net:
  - Transition from a blanket guarantee to a limited deposit insurance system recommended to reduce moral hazard.

### V. Financial Market Integrity and Infrastructure
- Payment and securities settlement systems:
  - Address systemic risks in payment and securities settlement system.
  - Finality of settlement of interbank transactions should not be subject to challenge in the event of bankruptcy.
  - SEC and the Thailand Securities Depository Company Co., Ltd. (TSD) should have authority and capacity to respond to financial failures by market participants.
  - Recommend legal separation of the Central Securities Depository (CSD) and the Central Counterparty (CCP) functions.
- AML/CFT framework:
  - Bring Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework in line with the FATF 40+9 Recommendations.
  - Effective mechanisms needed to implement and monitor Thailand’s AML/CFT regime.
  - Anti-Money Laundering Act 1999 (AMLA) will need to be amended.

### Key FSAP Recommendations (Box 1)
- Supervisory regime (Immediate priority; Medium-term priority):
  - Passage of pending legal reforms to address weaknesses in the financial supervisory framework, including establishing legal independence of the heads of the supervisory agencies and provisions for objective and transparent standards for dismissal.
  - Strengthen supervisory framework for insurance by establishing an independent supervisory board and moving to risk-based supervision and capital regimes.
  - Improve coordination among supervisory agencies through regular consultations and greater sharing of draft policies and regulations at the staff level. Improve process of consultations with market participants.
- Financial safety net framework (Immediate priority):
  - Transition from a blanket guarantee to a limited deposit insurance system.
- Central bank independence and transparency (Immediate priority):
  - Assure full legal and operational independence of the BOT in the conduct of monetary policy.
  - Clarify in the BOT Act the primary objectives of monetary policy.
- Role of the government in the banking sector (Medium-term priority):
  - Gradually reduce the government’s equity stakes in the private commercial banks.
  - Re-evaluate appropriateness of SFIs taking deposits in competition with commercial banks. If SFIs take deposits, they should be regulated and supervised like commercial banks.
- Distressed asset resolution (Medium-term priority; Immediate priority):
  - Reduce the large stock of NPLs and distressed assets in the Thailand financial sector and state-owned asset management companies.
  - Accurately identify and monitor the level and aging of NPLs in banks.
  - Address weaknesses in the legal infrastructure, including banks’ ability to seize collateral of defaulted borrowers.
  - Provide tax incentives for writing off NPLs.
- Financial infrastructure and integrity (Immediate priority; Medium-term priority):
  - Bring the AML/CFT framework in line with the international standard by amending the 1999 AMLA.
  - Amend the law to reduce legal risk to finality of settlement of interbank transactions in the event of bankruptcy and reduce systemic risks in the securities settlement system.
  - Legally separate the CSD and the CCP functions.

*Source: Executive Summary, _cr09147 - Executive Summary.*

### Box 2. Thailand: Recent Reforms to the Financial Sector Institutional Framework

### Box 2. Thailand: Recent Reforms to the Financial Sector Institutional Framework

### Overview
- Since the FSAP discussions, Thailand passed a number of critical legal financial sector reforms. The bulk of these were passed in December of 2007.
- The amended BOT Act (except sections related to the Deposit Protection Agency Act, which will be effective in August 2008) and the amended Securities and Exchange Act have come into effect since March 2008.
- The Financial Institutions Business Act and the Deposit Protection Agency Act will go into effect August 2008.
- The Office of Insurance Commission Act was passed in August 2007.
- These reforms address most of the legal and regulatory shortcomings identified in the assessments of the standards and improve coordination among regulators (e.g., formal inclusion of the Secretary Generals of the Office of Insurance Commission and Securities and Exchange Commission in the Financial Institutions Policy Committee (FIPC)).

### Amendments to the BOT Act
- Objectives explicitly spelled out: achieve monetary stability, payment system stability and financial stability.
- BOT has full operational independence to achieve monetary objectives.
  - No longer must receive the Ministry of Finance (MOF) approval for new issuance of its own bills for liquidity management.
  - BOT can pay interest on banks’ uncollateralized deposits held at the BOT.
- Selection and dismissal of the BOT governor and the length of term of the Governor and Board Chairman have been defined.
- Terms, qualifications and responsibilities of policy committee members (Monetary Policy Committee, Financial Institution Policy Committee and Payment System Committee), the Governor and the Board of Directors have been defined.
- Financial transparency is enhanced by defining auditing and reporting requirements.

### Financial Institutions Business Act (FIBA)
- Makes the BOT the sole regulator of commercial banks.
- Relationship between the MOF and the BOT clearly spelled out, improving transparency and accountability.
- Licensing power remains with the MOF, but the BOT can now close an institution.
- BOT granted the right to conduct consolidated supervision and the prompt correction action framework is explicitly anchored in the law.
- Fit and proper criteria for bank managers and board members have been defined.

### Deposit Protection Agency (DPA) Act
- The blanket deposit guarantee will be replaced with a limited deposit insurance.
- The new scheme will go into effect August 11, 2008, and will be phased in over 5 years.
  - The first year will have full coverage and will then gradually be reduced to B 1 million (equivalent to about US$33,000 at current exchange rate).
- A premium will be collected by the Deposit Protection Agency (DPA) to fund the deposit insurance.
- The initial capital of B 1 billion will be funded by the government.
- The DPA will act as liquidator in the case of failed and closed financial institutions.

### The Office of Insurance Commission Act
- Introduction of an independent regulator—the Office of the Insurance Commission.
- Movement toward risk-based capital regulatory framework for nonlife and life insurance.
- Movement toward International Accounting Standards (IAIS) Insurance Core Principles and early warning systems, which offer rating-based approaches.

### Securities and Exchange Act
- Gives the SEC power to provide information/assistance upon request of foreign capital market regulators without its own interest in the matter.
- The SEC and Thailand Securities Deposit Corporation are given the authority to act in the event that a licensed broker fails.
- The MOF is no longer appointed Chairman of the Board of the SEC.

*Source: IMF staff.*

### 10.      Considerable efforts have also been made to strengthen banks’ capital position

### _cr09147 - 10.      Considerable efforts have also been made to strengthen banks’ capital position

### Capital position and risk management
- Revisions to loan loss provisioning guidelines to comply fully with IAS by end-2007 led to higher provisioning charges for the banking system as a whole.
- A few large and mid-sized banks still have low loan loss coverage.
- The BOT has adopted a conservative approach to Basel II implementation, now expected at the end of 2008.
- Banks are aligning risk management practices and Information Technology systems for the move to Basel II.
- All but one bank have indicated they intend to adopt the standardized approach.

### Banking stability — overall assessment
- Despite efforts to improve banking soundness and lower NPLs, Thailand banks remain exposed to large holdings of NPAs and restructured loans.
- Total NPLs among banks amounted to 7.3 percent of total loans at end-2007, a modest improvement from 8.3 percent in 2005.
- The gross level of distressed assets in banks and AMCs amounted to B 1.5 trillion at end-2007, or 17.5 percent of GDP.
- NPLs reflect mainly bad debts not written off for legal and tax reasons.

### Distressed assets, provisioning, and coverage
- Higher provisioning (phased introduction of IAS39) impacted 2006/07 results.
- Loan loss provisioning has increased, but exposure to non-earning assets and restructured loans remains high.
- As of 2006 level of distressed bank assets:
  - NPLs Baht 440 bn
  - Restructured loans Baht 481 bn
  - Other NPAs Baht 241 bn

### Restructured loans and measurement caveats
- The BOT does not collect or monitor the stock of restructured loans on a regular basis; information for 2006 was collected as a result of a BOT survey.
- Restructured loans tend to have a relatively high reentry to NPL status.
- As of end-2006, restructured loans amounted to 5.7 percent of total bank loans.
- On average, about 14 percent of such loans reenter into nonperforming status.
- There is no updated data on restructured loans for 2007.

### Credit ratings and risk perception
- Banks’ large holdings of NPLs, poor performance of restructured loans, questions regarding adequacy of provisioning levels, and unfinished legal reforms weigh on banks’ credit ratings and risk perception.
- Rating signals in 2007 included:
  - Fitch’s Banking System Index: C/D rating
  - Moody’s Bank Financial Strength Rating (BFSR): individual D ratings
  - Standard and Poor’s Banking Industry Country Risk Assessment (BICRA): Group 6 (scale of 1–10 with 1 the highest)

### 2007 ratings of six largest commercial banks (as presented)
- Bangkok Bank (BBL): Moody's Long term deposits Baa1, BSFR Individual D+, Fitch Long term Foreign Issuer BBB+, Outlook Stable (table formatting preserved as per source).
- Krung Thai Bank (KTB): Moody's Baa1, BSFR Individual D-, Fitch BBB, Outlook Stable.
- Siam Commercial Bank (SCB): Moody's Baa1, BSFR Individual D+, Fitch BBB, Outlook Stable.
- Kasikornbank (Kbank): Moody's Baa1, BSFR Individual D+, Fitch BBB, Outlook Stable.
- TMB: Moody's Baa2, BSFR Individual D-, Fitch BB+, Outlook Negative.
- Bank of Ayudhya (BAY): Moody's Baa3, BSFR Individual D-, Fitch BBB-, Outlook Positive.
- (Source table: Moody's, Fitch, Standards and Poors (S&P), and Bloomberg.)

### Causes of slow progress on legacy NPLs
- A weak credit culture and weak creditor rights, including:
  - A nonsupportive legal and judicial framework that makes restructuring and foreclosure cumbersome and costly.
  - Tax disincentives for prompt recognition of losses through write offs.
  - Until recently, gaps in regulatory treatment of restructured loans.
- Political economy factors: mission’s opinion that slow progress may reflect political clout of family-owned corporates, which may explain difficulties in converting debt into equity, modest changes in ownership, and failed attempts to address shortcomings in the Bankruptcy Act and Civil Procedure Code.
- Consequences: reduced value of NPLs, discouraging banks from selling at market value, weakening credit culture, and protracted bankruptcy reducing economic value and efficiency.

### Policy recommendations to address NPAs and prevent recurrence
- BOT measures and supervisory actions:
  - Full implementation of IAS 39 to bring clarity and veracity to bank balance sheets and encourage prompt dealing with problem loans.
  - Strengthen supervisory program to hold bank management fully accountable for identifying distressed assets and criticize management that relies on supervisors to uncover problem loans.
  - Maintain conservative guidelines on restructured loans, notably by requiring restructured loans to perform for at least three payment periods before reclassifying as performing to reduce multiple restructurings.
- Government legal and tax reforms:
  - Expedite foreclosure processes, enhance effectiveness of the specialized bankruptcy court, and adopt a liquidity test to better reflect true financial position of troubled debtors.
  - Reform tax regulations to permit prompt recognition of losses by making it easier to deduct provisions or write offs for tax purposes.
- State-Owned AMCs:
  - Require state-owned AMCs to accelerate pace of distressed asset disposal.
  - Set more aggressive, objective (possibly time-bound) benchmarks and realistic guidelines for AMC managers, explicitly acknowledging that market prices may be below the valuation assigned to assets being sold.
  - Develop a realistic exit strategy for AMCs.
  - Note: The closure of Financial Institutions Development Fund (FIDF)—the owner of the state-owned AMCs—has been postponed from 2009 to 2013. Thailand Asset Management Corporation (TAMC), by law, is to wind down its operations by end-2011. There are no such clauses for Sukhumvit Asset Management Co, Ltd and Bangkok Commercial Asset Management Co, Ltd.
- State ownership and bank divestiture:
  - Government should continue divestiture program of equity stakes in commercial banks recapitalized during the crisis; these equity investments were expected to be temporary.
  - Develop and implement an exit strategy from government ownership of commercial banks.
  - Ensure state-owned banks (including KTB) are subject to same regulatory treatment regarding external auditors as private banks and insulated from political interference via proper governance structure and enhanced disclosure.
  - Over time, consider full privatization of state-owned banks.

### Stress test results and implications
- Scope:
  - Stress tests by BOT, the mission, and eight largest commercial banks (accounting for 88 percent of Thailand banking system assets at end-2006) included single factor stress tests and macroeconomic scenario analysis—both a global and domestic stress event.
- Key findings:
  - Banking system generally resilient to a variety of macroeconomic and factor specific shocks, but weaker banks require continued close supervisory attention.
  - Credit risk is the main source of vulnerability given large loan book (loans account for about half of banking assets, bulk extended to corporates).
  - Under two shock scenarios, NPLs as percent of total loans would approximately double over a two-year horizon.
  - Banks accounting for about one-fifth of total banking assets would fall below BOT’s minimum CAR.
  - Liquidity risk was material for a few banks notwithstanding high system-wide liquidity.
  - Interest rate risks on banking book were contained; only one small bank reported significant impact in terms of regulatory capital.
  - No common pattern of behavior across banks—impacts varied with positions and maturity structures.
  - Market risks had minor impact due to small trading portfolios, regulatory limits, small proprietary trading positions, and use of “plain vanilla” hedging instruments.
  - Contagion risks through interbank and international markets were negligible due to very small interbank exposures and reduced balance sheet exposure to international credit markets; banks rely mainly on retail deposits for funding.
- Coverage gaps:
  - Stress tests for banks’ exposure to the housing market and for some larger deposit-taking SFIs (e.g., Government Housing Bank) could not be conducted due to lack of sufficient supervisory financial information.

### Nonbank financial institutions and capital markets
- Nonbank financial institutions:
  - Contractual savings institutions are growing but remain small in system role.
  - Insurance sector: mid-development stage, profitable.
    - Insurance penetration (total premium to GDP) stood at 3.6 percent.
    - Insurance density (total premium per capita) was US$99.
    - The sector, measured by premium, is the largest among ASEAN members.
    - FSAP team found sector sound and profitable but recommended strengthening regulatory framework.
  - Pension/provident fund industry is small (partly reflecting lack of a mandatory social security system).
  - Mutual funds: 724 funds managing about B 1.14 billion in net asset value at end March 2007; fixed income funds account for bulk of net asset value, mostly short-term money market funds.
  - Brokerage industry: relatively small, not well capitalized, faces entry restrictions, has performed poorly in contributing to market development; brokerage firms not active traders, limit underwriting to equity, rely heavily on retail-driven sales at fixed commission fees.
- Capital markets:
  - Bond market large but dominated by public debt instruments; corporate debt issuance limited.
  - Primary market for government securities functions relatively well; liquidity in secondary market is poor.
  - Suggested measures: address fragmentation of public debt, strengthen role of primary dealers as market makers, improve public debt management (including reducing frequency of auctions while increasing size of individual offerings) to promote secondary market liquidity.
  - Equity markets:
    - Total market capitalization equivalent to 75 percent of GDP at end-2006.
    - SET characteristics: heavy concentration (ten largest companies account for 40 percent of total market capitalization), high volatility, retail-driven (retail investors account for over half of daily market turnover), and low valuation (price-to-earnings ratio of less than 10).
    - Measures to deepen equity markets: government renew commitment to privatization, liberalize entry restrictions into brokerage industry, eliminate SET regulation that mandates fixed brokerage commissions.

*Content unit: _cr09147 - 10.      Considerable efforts have also been made to strengthen banks’ capital position.*

### 21. While the regulatory and supervisory program for banking in Thailand reflects

### _cr09147 - 21. While the regulatory and supervisory program for banking in Thailand reflects

### Legal framework, supervisory independence, and governance
- Finding: The regulatory and supervisory program for banking in Thailand reflects a high degree of compliance with international standards, but its effectiveness is threatened by an outdated legal framework and absence of formal legal independence.
- Finding: Responsibility for banking supervision is shared between the MOF and the BOT and the BOT formally lacks full and independent enforcement capabilities.
- Observation: The mission found no evidence of the MOF interfering in the supervisory operations of the BOT, but the legal subordination of the BOT to the MOF has the potential to lead to interference or delay in taking required regulatory action and delays in operational supervisory decisions.
- Risk: The MOF could, in theory, overrule the BOT’s regulatory decisions; BOT regulatory powers could be challenged in court and overruled; corrective measures lacking explicit legal underpinnings may be more easily revoked.
- Recommendation: Expeditiously pass and implement pending draft laws to address legal weaknesses and reduce legal uncertainty.
- Recommendation: Amend current laws to include appropriate procedures for appointment and dismissal of the heads of regulatory bodies so that:
  - the supervisory agencies have the necessary legal powers to fully meet their mandate to preserve the soundness and stability of the financial system;
  - the heads of the supervisory agencies are appointed for significant fixed terms and on the basis of their qualification and integrity;
  - there are objective safeguards regarding their dismissal—with conditions for dismissal explicitly stated in the law.
- Recommendation: On the rare occasions a governor or head is to be dismissed, the reasons should be clear and publicly disclosed.

### Consolidated supervision and universal banking risks
- Finding: The BOT lacks legal powers to conduct consolidated banking supervision over banks’ exposure to their insurance or securities businesses.
- Practice: To manage this gap, the BOT has used moral suasion and contractual conditions (e.g., imposing conditions when banks apply for permits and licenses).
- Risk: Undue risk exposures could arise for banks in universal banking activities, particularly if nonbank segments are not well regulated and coordination among regulators is weak.
- Recommendation: Grant the BOT explicit legal authority to perform consolidated supervision.

### Conflict of interest: BOT and FIDF
- Finding: The BOT is involved in management and ownership functions in intervened banks via its organizational role with the FIDF.
- Detail: Although the FIDF is an independent juristic entity and the MOF has assumed the FIDF’s liabilities, in practice the FIDF is run within the organizational framework of the BOT and managed by a board chaired by the Governor and staffed by both the BOT and MOF.
- Risk: This creates an appearance of conflict of interest where the BOT is required to supervise banks in which it is involved as owner/manager.

### Supervision of deposit-taking SFIs
- Finding: Loan performance at SFIs, as measured by the level of outstanding NPLs compared to total loans, is weak, with potential fiscal implications.
- Finding: Deposit-taking SFIs operate alongside commercial banks but are regulated under separate SFI-specific laws.
- Risk: Different regulatory regimes and special privileges for SFIs can create level-playing-field concerns and distort competition.
- Current arrangement: The MOF has delegated authority to the BOT to examine the SFIs on an annual basis, but overall supervision remains with the MOF.
- Recommendation: If SFIs continue operating as major deposit-taking institutions, they should be supervised in the same manner as commercial banks.
- Risk: The bifurcated approach to examination and supervision of SFIs creates potential reputation risk for both the BOT and the MOF.

### Insurance sector supervisory shortcomings and reforms
- Finding: Shortcomings in the regulatory and supervisory framework governing the insurance sector are well understood and authorities are beginning to address them.
- Key reforms identified:
  - amend the insurance law to establish the insurance supervisor as an independent authority;
  - move toward risk-based capital and supervision;
  - introduce a policyholder protection scheme.
- Recommendation: Undertake a comprehensive stress test to assess sector vulnerabilities.
- Expected outcome: Implementing these reforms would provide a sounder platform to support expected continued growth.

### Capital markets regulation and SEC independence
- Finding: The regulatory framework for capital markets is fundamentally sound, but the SEC’s regulatory independence should be strengthened.
- Finding: Under the current Securities Exchange Act (SEA), the MOF has formal authority to supervise the SEC, and the MOF has been assigned formal licensing responsibilities for securities firms and mutual fund operators—arrangements not in line with international standards.
- Recommendation: Amend the SEA to:
  - empower the SEC to independently bring civil proceedings when securities laws are violated;
  - clarify the legal definition of insider trading.

### Inter-regulator coordination and stakeholder consultation
- Finding: The current institutional arrangement with different regulatory bodies is adequate; creation of an integrated regulator’s costs would appear to outweigh benefits.
- Recommendation: Focus on:
  - strengthening regulators’ legal power;
  - creating a separate insurance regulator;
  - improving coordination among regulators and industry participants.
- Recommendation: Increase regular, frequent, and open consultations and discussions among regulators and, as appropriate, the MOF at the staff level—including early consultations in the drafting stage of critical reforms.
- Recommendation: Enhance dialogue and consultations with industry as policies are developed.
- Note: A number of committees for consultation exist and Memorandums of Understanding (MOU) have been formalized among various regulatory bodies.

### Crisis management, bank resolution, and safety net
- Finding: The BOT has a sound crisis management framework, including a contingency plan for a systemic banking crisis and a continuity plan for disaster events; guidance to banks on disaster recovery and business continuity; and a crisis management committee (CMC) chaired by the BOT Governor.
- Finding: The BOT has transparent guidelines governing the use of emergency credit to lend to banks perceived as solvent but illiquid; a working group arranges scenarios for annual testing and feedback.
- Finding: Several critical bank resolution decisions remain under the purview of the MOF (granting/suspending/revoking licenses, approving mergers and acquisitions, deciding on conservatorship, liquidating problem assets).
- Finding: Many supervisory activities require joint decisions between the MOF and the BOT; the BOT frequently must recommend actions to the MOF and await approval (examples: increase in troubled bank’s capital funds, removal of directors or executive officers).
- Risk: Sharing regulatory enforcement powers with the MOF can result in delays in supervisory decisions.
- Recommendation: Implement the recently designed prompt preventive action (PPA) and prompt corrective action (PCA) framework by the BOT; the PCA is awaiting MOF’s approval.
- Note: For actions potentially involving taxpayers’ money (e.g., financial assistance to resolve troubled banks), the MOF needs to be fully involved in decision-making.
- Finding: Thailand remains the only East Asian crisis country that has not yet formally removed its blanket deposit guarantee.
- Recommendation: Put in place a limited deposit protection scheme that includes enhanced bank resolution tools for early resolution and mandates minimizing costs related to support for uninsured depositors.

### Systemic liquidity management, payment systems, and market infrastructure
- Finding: The BOT has a range of powers and instruments for effective systemic liquidity management and full autonomy over use of its own instruments.
- Policy action: The BOT is closing its repurchase (RP) window to promote more active use of the interbank market for liquidity management.
- Legal shortcomings: Proposed amendments to the BOT Act would permit the BOT to pay interest on banks’ uncollateralized deposits held with the central bank and remove the need for BOT to receive MOF approval on the overall ceiling for BOT bills/bonds issued for monetary purposes; passage of amendments would address these shortcomings.
- Finding: Assessment of BOT’s Automated High-Value Transfer Network (BAHTNET) shows the payment system is well developed and governed but exposed to systemic risks.
- Risk: Finality of settlement of interbank transactions can be challenged in the event of bankruptcy.
- Finding: The SEC and the TSD do not presently have authority to respond promptly to financial failures by market participants.
- Recommendation: Address the two shortcomings regarding settlement finality and the SEC/TSD authority quickly.

### AML/CFT framework
- Finding: The current AML/CFT framework needs to be brought in line with the Financial Action Task Force (FATF) 40+9 Recommendations.
- Evidence: Thailand’s regime has yielded a very large number of suspicious transaction reports, a large amount of seized assets, and contributed to tackling drug crime.
- Weaknesses: Legal and institutional framework not fully in line with international standards—weaknesses in legal framework, pursuit of money laundering cases, coverage of institutions, and enforcement.
- Recommendation: Amend the AMLA to:
  - properly criminalize all serious predicate money laundering offenses;
  - provide for more comprehensive coverage of financial institutions;
  - clearly delineate roles of the Anti-money Laundering Office (AMLO) and the financial sector supervisors for monitoring compliance and provide appropriate powers for conducting compliance examinations.
- Recommendation: Require financial institutions to develop internal policies, procedures and controls for AML/CFT.

### Basel Core Principles (BCP) assessment and financial sector structure
- Finding: The framework for banking supervision has been considerably strengthened since the crisis of the last decade; the BOT has competent supervisory staff and comprehensive prudential regulations and guidance based on international best practices.
- Finding: A system of risk-based supervision is in place, employing well documented and implemented on- and off-site techniques.
- Concern: The enabling legal framework remains a concern as the MOF (and not the BOT) has legal empowerment to take action on several routine aspects of supervision.
- Major gap: Supervision and regulation of state-owned deposit-taking SFIs, which function as commercial banks but are not under the same supervisory regime as banks.
- Recommendation: Expedite passage of laws and amendments to provide the BOT required operational independence and address SFI supervision gaps to improve compliance with the BCP.
- Assessment context: The BCP assessment reflects practices as of the end of January 2007 and was based on the 1997 version of the BCPs and the 1999 assessment methodology.
- Visit dates: The FSAP mission visited Bangkok during January 16–31, 2007.
- Financial sector statistics and market structure:
  - Commercial banks account for almost 62 percent of financial sector assets at end-2006.
  - The top five commercial banks account for about 61 percent of banking assets and 65 percent of deposits.
  - The stock and bond markets have market capitalization at 72 percent of GDP and 44 percent, respectively.
  - The number of deposit-taking institutions declined from 135 at end-1996 to 50 at end-2006, with most consolidation among finance companies.
  - Foreign-owned banks play an important role but their contribution is restricted.
  - The government’s role as shareholder increased sharply over the past decade; government has controlling stakes in three banks and significant shares in three others.
  - There are several SFIs, four of which take public deposits and operate in competition with commercial banks.

*Source: IMF FSAP chapter/section as provided in the content unit.*

### 42. Banking fundamentals continue to strengthen, with most Thailand banks

### _cr09147 - 42. Banking fundamentals continue to strengthen, with most Thailand banks

### Banking fundamentals and key statistics
- The average capital-to-risk weighted assets ratio for Thailand banks was 14 percent at end-2006.
- Banks’ profitability strengthened since 2004 but fell in the fourth quarter of 2006 due to large provisioning requirements arising from the introduction of IAS 39.
- Gross NPL ratio about 7.5 percent.
- Loan loss coverage ratio at 70 percent as of end-2006.
- Average rate of reentry of restructured loans into the NPL category of 14 percent.

### Preconditions for effective banking supervision
- Legal system: Thailand has a civil law system; courts apply or interpret statutory provisions.
- Legislation: New legislation for banking and banking supervision—including the FIBA, the amended BOT Act, and a DPA—were in the legislative process but had not yet been passed at the time of the assessment.
- Credit environment: Marked improvement—credit rating and scoring systems developed in banks; a credit bureau now serves banks and nonbanks.
- Insolvency and foreclosure: Bankruptcy Act and Civil Procedure Code amended; a Bankruptcy Court and a Bankruptcy Case Procedure Act enacted.
- Legacy NPAs: Resolution remains slow due to prolonged collateral possession processes and a “wait and watch” attitude by banks and AMCs anticipating property market recovery.
- Crisis management: BOT prepared a contingency plan for systemic banking crises, continuity plan for disaster events, issued guidance to banks, designated a crisis management committee chaired by the BOT Governor, and set up a working group to arrange and test scenarios annually.

### Main findings (BCP/CP framework)
- Objectives, autonomy, powers, and resources (CP 1)
  - Responsibility for banking supervision is shared between MOF and BOT; BOT may act on its own for some activities but often must recommend to MOF and await approval.
  - MOF has delegated to BOT the ability to conduct offsite monitoring and onsite examinations of commercial banks and SFIs.
  - BOT has adequate and skilled resources but objectives, autonomy, and legal authority are affected by deficiencies in the legal framework.

- Legislative and enforcement shortcomings
  - Shortcomings in present legislation hinder effective supervision; BOT compensates by attaching contractual conditions when issuing permits.
  - Lack of explicit legal powers reduces the effectiveness and could impair timeliness and effectiveness where MOF approval is required.

- Licensing and structure (CPs 2–5)
  - Some state-owned SFIs may receive deposits under special Acts; SFIs regulated and supervised by MOF, though MOF delegated examinations to BOT.
  - SFI Acts set out corporate governance and audit rules partly different from commercial banks.

- Prudential regulations and requirements (CPs 6–15)
  - Capital adequacy aligned with the Basel Capital Accord of 1988, with exceptions: reduced risk-weights recently introduced for loans collateralized by residential real estate and for small retail loans.
  - Reduced risk-weights currently have insignificant effect on capital but may weaken the capital adequacy regime until the remaining parts of the new framework are applied after December 2008.
  - BOT issued detailed guidance on risk management; NPL classification uses qualitative and quantitative criteria.
  - High level of restructured loans and high proportion reentering NPL status in some banks.
  - Country risk management guidance recently issued; banks in process of implementing frameworks and risk rating/provisioning systems.
  - Operational risk framework includes fraud losses; AML/CFT components reinforced via onsite examination; comprehensive supervisory guidelines recently issued and MOU for information sharing between BOT and AMLO just signed.

- Methods of ongoing supervision (CPs 16–20)
  - BOT follows continuous supervision with onsite and offsite based on key-risk assessment.
  - BOT lacks legal authority to call for information on a consolidated basis or from related entities; requires MOF approval to introduce periodic reporting requirements.

- Information requirements and accounting (CP 21)
  - Local accounting standard conforms generally with the IAS, with some exceptions.
  - IAS 39 being implemented on a gradual basis, including stricter loan-loss provisioning rules.
  - External auditors’ appointment must be approved by BOT yearly; auditors must report material findings to the bank’s Board and BOT and provide special reports on internal audit effectiveness and related lending.

- Formal powers of supervisors (CP 22)
  - Laws provide a wide range of remedial powers to MOF/BOT but BOT may need MOF approval for corrective actions; BOT has proposed a structured policy framework for PCA against under-capitalized banks.

- Cross-border banking (CPs 23–25)
  - Overseas assets of Thailand banks are about 7 percent of total assets.
  - BOT recently began onsite inspections of major overseas operations; MOUs for information-sharing with foreign supervisors concluded in a few cases.

### Summary compliance highlights (selected CP observations)
- CP1: BOT has adequate skilled resources but legal framework deficiencies affect objectives, autonomy, and legal authority; draft amendments expected to improve compliance.
- CP6: Compliant with Basel I except for recently reduced risk weights for residential mortgages and lending to small business.
- CP11: Guidelines on country risk management introduced in July 2006; banks implementing them.
- CP15: Comprehensive AML guidance issued recently; examiners had been assessing abuse of the financial system previously.
- CP18: BOT developed skilled offsite supervision but lacks legal ability to prescribe consolidated reporting or periodic reports without MOF approval.
- CP20: In absence of explicit legal consolidated supervision powers, BOT resorts to moral suasion and sanction.
- CP22: Corrective action available but often requires Minister approval, which may delay remedial measures.
- CP23–25: Meets essential criteria; BOT implemented visits of overseas operations and entered MOUs with some foreign counterparts.

### Recommended Action Plan (selected items)
- CP1: BOT to be given legal authority to issue regulation, conduct supervision, and take enforcement actions without requiring approval of the Minister.
- CP2: Amend laws to enable SFIs taking public deposits to be regulated and supervised as banks by BOT.
- CP6: Ensure banking system and individual banks maintain adequate capital during transition to Basel II especially given recent reduction in some risk weights.
- CP8: Review and strengthen regulations on loan restructuring to prevent high rate of reentry of restructured loans to nonperforming status.
- CP9 & CP10: Provide explicit legal authority to interpret related and connected parties to identify exposures created through complex nominee structures.
- CP11: Fully implement July 2006 country risk guidelines for banks with material exposures.
- CP15: Follow up implementation of 2007 guidelines on AML/CFT and operationalize information sharing with AMLO according to the MOU.
- CP18: BOT to obtain legal powers to call for reports from banks without MOF approval and to call for reports on a consolidated basis.
- CP19: External auditors of all banks should be subject to same supervisory requirements including approval; independent external audit should supplement any OAG audit.
- CP20: BOT to have legal authority to conduct consolidated supervision in all aspects without MOF approval.
- CP21: Require external auditors to report all material findings to the Board and BOT immediately instead of within 90 days.
- CP22: BOT should have legal authority to take a broad range of corrective actions without MOF approval.
- CP24: BOT should continue to pursue MOUs with significant home/host supervisors.

### Authorities’ response and follow-up actions
- Authorities thanked the FSAP mission and noted high degree of compliance with BCP principles while acknowledging gaps and steps taken to implement recommendations.
- Legislative progress reported: in December 2007, the National Legislative Assembly passed the new FIBA and DPA, and the amendment of the BOT Act.
  - Under the new FIBA, BOT will have broad explicit supervisory power, including authority to conduct consolidated supervision and take prompt corrective actions; BOT will have sole responsibility for virtually all ongoing supervisory tasks, while the Minister retains formal authority to grant or revoke licenses only on BOT’s recommendation.
  - The amended BOT Act will enhance operational independence: Governor to be appointed on a fixed term basis (5 years) with conditions for premature dismissal specified.
  - The new DPA will provide explicit, limited deposit guarantee to depositors and reduce moral hazard.
- Basel II: Stated that Basel II will be fully implemented in Thailand in 2008; BOT committed to sound regulation and considering FSAP recommendations for future policy.
- BOT notes it has implemented a consolidated supervisory framework, early warning system, bank resolution methodologies, and strengthened supervisory review (Pillar II) since 2001. Examiners have used qualitative judgment and penalties where prudential requirements are not met.
- Interagency cooperation: Use of formal MOUs and informal contacts; Financial Institutions Policy Committee provides coordination with MOF, SEC, DOI, Council of State, FAP, and Agricultural Futures Exchange.
- SFIs: Authorities emphasize that SFIs’ economic and social objectives should continue to be maintained; international standard practices would inform reform design and evaluation, but MOF cautions against overly prescriptive norms lacking flexibility.

### Role of SFIs
- Some SFIs represent a fifth of public deposits and act as commercial banks but are not formally subject to the same supervisory regime in many respects; MOF has delegated their examination to BOT, but MOF is not bound to act on BOT advice.
- Authorities stress the need for a comprehensive, medium-term strategy for SFIs and systematic evaluation of outcomes and cost-effectiveness of government policy intervention, while retaining flexibility to fit Thailand’s circumstances.

*Source: IMF FSAP assessment excerpt for Thailand—banking supervision and compliance with Basel Core Principles.*

### 62. SFIs are important and vital to provide financial services to specific groups such

### _cr09147 - 62. SFIs are important and vital to provide financial services to specific groups such

### Role and mandate of State Financial Institutions (SFIs)
- SFIs provide financial services to specific groups such as the low–income households, farmers and infant SMEs.
- These groups "are the backbone and blood line of the country and do not have access to normal financial markets."
- SFIs partially perform the same banking functions as private commercial banks but overlap with commercial banks is "insignificant."
- Customer base: "Most of SFIs customers are low and medium income people and in the provincial areas."
- Lending characteristics: SFIs provide loans with concessional terms and conditions; loan amounts are "very small compared with commercial banks."
- Example: Government Housing Bank (GHB) — "90 percent of the GHB lending portfolio is loans that are less than B 1 million."
- SFIs' operation in overlapped market segments does not "undermine the role of the private financial sector" and can act as a "benchmark for commercial banks to improve their operation."

### Deposit-taking SFIs and funding
- One mission of SFIs is to "promote and enhance the saving discipline of Thailand people."
- Deposit-taking SFIs include: Government Housing Bank (GHB), Bank for Agriculture and Agricultural Cooperatives, Government Savings Bank (GSB). (SME Bank is not a deposit taking institution.)
- Deposit profile: "Most of the deposits placed are from their borrowers and mostly low-income home owners and farmers."
- SFIs serve as development banks and a government mechanism to fill financial service gaps and support economic policy.
- Ministry of Finance (MOF) role:
  - MOF is responsible for supervising SFIs with a "special supervisory framework" consistent with SFIs' mandate.
  - Direction and policy to comply with international prudential standards "is clear and MOF and all SFIs are well aware."
  - MOF supervision operates "under the certain legal framework in each Enabling Acts" identifying key prudential regulation.
  - MOF has increased prudential regulation in areas such as "capital adequacy, liquidity asset, asset classification and provisioning" via Ministry Regulation or Declaration.
  - Assessment: "the way SFIs have been supervised has been appropriate."
- Performance since the financial crisis: SFIs "did not suffer the same problems as the commercial banks" and were assigned "as a public mechanism to revitalize the Thailand economy."
- Market share example: In the housing market, SFIs "has commanded almost half of the market share" because "the commercial banks could not provide mortgage loans."

### Enhancing supervision, monitoring and transparency
- Ongoing MOF projects to strengthen supervision include:
  - SFIs Monitoring and Reporting System
  - Information Dissemination through the FPO website
  - NPL Resolution plan "(year 2006–2008)"
- Competitive advantages and fiscal treatment:
  - SFIs are exempted from corporate income tax "(30 percent)", specific business tax "(3.3 percent)" and stamp duties.
  - As State-Owned Enterprises, SFIs have revenue remittance commitments to MOF.
  - GSB, GHB and EXIM are required to remit "35–45 percent of their profit to the MOF."
  - Their revenue remittance "is compatible (more or less) to corporate tax payment."

### SFI revenue remittance (Table 7 figures)
- Table 7 shows remittance requirements and FY outcomes:
  - GSB
    - Remittance Ratio (%) as of 2004: 35
    - Remittance Ratio (%) as of 2007: 45
    - FY2006: 6,000.00 (Unit: Million Baht)
    - Remittance Ratio* FY2006: 59.20
    - FY2007: 6,557.06
    - Remittance Ratio* FY2007: 57.12
  - GHB
    - Remittance Ratio (%) as of 2004: 35
    - Remittance Ratio (%) as of 2007: 40
    - FY2006: 1,893.00 (Unit: Million Baht)
    - Remittance Ratio* FY2006: 41.50
    - FY2007: 1,988.6
    - Remittance Ratio* FY2007: 41.38
  - EXIM
    - Remittance Ratio (%) as of 2004: 35
    - Remittance Ratio (%) as of 2007: 35
    - FY2006: 161 (Unit: Million Baht)
    - Remittance Ratio* FY2006: 30.64
    - FY2007: 200.45
    - Remittance Ratio* FY2007: 33.48
  - Total
    - FY2006: 8,054.00 (Unit: Million Baht)
    - FY2007: 8,746.11 (Unit: Million Baht)
- Note: "*Remittance Ration - % of profit remitted to MOF."

### Summary assessment of implementation of the IOSCO Principles (SEC and market overview)
- General: "Thailand has a fundamentally sound system for regulation of its capital markets."
- Key institutional and market statistics:
  - SET: created by law in 1975.
  - TFEX: began operation in 2006 (wholly owned subsidiary of the SET).
  - "Equity trading of listed companies must occur on the SET."
  - Number of listed companies: "518 listed companies on the SET."
  - Total market capitalization: "approximately B 5 billion (as of December 2006)."
  - Daily trading averages: "B 16.3 billion."
  - Investor composition of daily trading: "Retail investors account for over 55 percent of daily trading. Foreign investors account for 34 percent and institutional investors for the remaining 11 percent."
  - TFEX product: "Only one product is currently available on the TFEX, a SET50 future."
  - Mutual funds: "As of December 2006, there were 18 asset management companies managing 807 mutual funds, with total assets of approximately B 1,222.5 billion."
  - Debt market: "The total estimated value of the corporate debt market is approximately B 1 trillion" and "the value of the daily trading is less than 3 percent of the total."
- Market structure and dynamics:
  - Market valuation: "Market valuations following the market declines in fall 2006 are relatively low, with a typical P/E ratio of less than 10."
  - Concentration: "The ten largest cap companies represent approximately 40 percent of the total market cap."
  - Government ownership: "The government continues to own a substantial portion of these largest companies" leading to limited free float liquidity.
  - Brokerage community: "There are currently 41 licensed firms" and brokerage revenue is "estimated at 75 percent of total industry revenue" from commissions. Commission rates are fixed by the SET.
  - Bond market trading: daily transactions typically "less than 300" excluding bank repo transactions.

### Main findings by principle (selected highlights)
- Principle 1: Responsibilities of regulator are "clearly and objectively stated" for SEC Board and Secretary General, but "no formal coordination mechanism" to enable SEC participation in policy decisions that might materially affect markets.
- Principle 2: Legal framework allows Minister of Finance significant potential involvement; this "would jeopardize the independence of the SEC."
- Principle 3: Restricting total number of securities firm licenses impairs fair and effective regulation.
- Principle 4: Official government actions must be published in the Thailand Official Gazette; public release of inspection report summaries and grades is positive.
- Principle 5: SEC employee investment restrictions should extend to spouses, minor children and controlled accounts; SEC should verify compliance.
- Principles 6–7: SEC requires additional legal authority to review all SET rules and disciplinary actions taken by SET.
- Principle 8: SEC should have authority to obtain court orders to compel compliance with investigative subpoenas.
- Principle 9: SEC requires legal authority to bring civil actions and impose monetary penalties administratively.
- Principle 10: SEA should be amended to remedy gaps in legal definitions for insider trading and market manipulation.
- Principles 11–13: SEC has authority to share information broadly but faces impediments; SEC unable to seek/provide information to foreign regulators unless it has its own interest.
- Principle 14: Disclosure system is comprehensive with procedures for review, onsite visits and review of auditor work papers.
- Principle 15: Changes in law required to implement 2005 ROSC corporate governance recommendations.
- Principle 16: FAP is completing transition to IFRS and "will require greater resources for interpretation and application."
- Principles 17–20: Comprehensive systems for licensing, inspection, trustee custody and NAV calculation (daily NAV in accordance with AIMC guidelines).
- Principle 21: Current system requires new entrants to purchase existing licenses from defunct entities.
- Principle 22: SEC rules require adequate levels of operating capital and ongoing reporting.
- Principle 24: SEC lacks authority to act when a firm fails to safeguard investor funds and assets; TSD and SET fund available only for settlement of outstanding trades.
- Principle 25–27: SET and TFEX authorized and supervised by SEC; equity trading transparency "appears sound"; bond market transparency has improved but needs further work.
- Principle 28–29: Legal interpretations and limited authority impede action on insider trading, market manipulation and systemic disruption prevention.
- Principle 30: Clearing and settlement assessed separately (CPSS/IOSCO Assessment).

### Recommended action plan (selected recommendations)
- Principles Relating to the Regulator (P 1–5):
  - Create a formal coordination mechanism among governmental agencies with regulatory authority over the capital markets.
  - Transfer final licensing authority over securities firms and mutual fund administrators to the SEC.
  - Confirm that the Minister of Finance does not have authority over daily SEC operations.
  - The SEC should publish for public consultation the complete text of its draft regulations.
- Principles of Self-Regulation (P 6–7):
  - Amend the SEA to enable SEC to review and approve or require changes to all SET rules and to review SRO disciplinary actions.
  - The FAP requires additional resources.
- Principles for the Enforcement of Securities Regulation (P 8–10):
  - Examine adequacy of surveillance of the OTC debt market.
  - Amend the SEA so the SEC independently files civil enforcement actions including money sanctions, restitution and corrective action.
  - Give the SEC authority to temporarily suspend trading in individual securities and to refer criminal actions directly to the Public Prosecutor.
  - Permit private class action legal cases.
- Principles for Cooperation in Regulation (P 11–13):
  - Finalize a formal MOU with other Thailand regulatory bodies for full exchange of information.
  - Create a coordinating body of senior officials for regulatory policy exchange.
  - Amend the SEA to enable the SEC to seek information on behalf of foreign regulators.
- Principles for Issuers (P 14–16):
  - Amend the SEA in accordance with the 2005 ROSC on corporate governance.
- Principles for Market Intermediaries (P 21–24):
  - Remove restriction requiring new securities dealers to purchase existing licenses; do not extend the 2012 deadline.
  - Empower the SEC to appoint a liquidator or receiver to protect customer accounts and preserve assets of failing securities firms.
  - Address bankruptcy law protection for customer assets held in street name and settlement integrity for unsettled transactions.
- Principles for the Secondary Market (P 25–30):
  - Continue improvements in debt market transparency, consider "creation of better depth of book disclosure for equities and meaningful electronic disclosure of dealer quotes in the debt market."

*Italic: Content derived from _cr09147 - 62. SFIs are important and vital to provide financial services to specific groups such as the low–income households, farmers and infant SMEs (IMF source PDF).*

### 79. Joining FSAP is a very fruitful experience for the SEC, Thailand. The assessment

### _cr09147 - 79. Joining FSAP is a very fruitful experience for the SEC, Thailand. The assessment

### SEC assessment and overall conclusion
- Joining FSAP produced assessment results that "reflect a satisfactory level of implementation of IOSCO Principles" and "can serve as an assurance that Thailand’s securities regulation is on par with international best practices."
- Major weaknesses identified largely involve "limitations in our legal authority" and "have been treated as highest priorities in our ongoing law amendment agenda."

### Independence of the SEC
- In practice, the SEC has operational independence in day-to-day activities.
- A certain provision (262) in the securities law is "theoretically open for possible involvement by the Finance Minister in SEC daily decisions," but that provision "has never been invoked by any Minister."
- The existing SEC Board composition—with the Minister of Finance as Chair and a number of government appointees—"cannot be considered independent" though in practice the Minister has never involved in the SEC’s daily activities.
- A proposed amendment to restructure the SEC Board composition and improve appointment and dismissal processes for Board members is in the process of enactment.

### Enforcement powers
- Mission recommendation: grant the SEC the power to file civil enforcement actions independently, including the power to impose money sanctions against violators of the SEC Act, to "help enhance the SEC’s enforcement authority significantly."
- The SEC considers improvement in administrative power important, particularly:
  - "imposition of administrative sanctions on those who are not regulated persons or entities under the SEC Act;"
  - "the explicit power to bar or blacklist a person from being a director of a listed company" as a meaningful tool to enforce regulations related to good corporate governance and enhance law enforcement effectiveness.

### Authority to deal with a failing securities firm
- Identified gap: SEC lacked legal authority to deal with a failing securities firm.
- A draft amendment to the SEC Act was proposed and accepted by the Cabinet to give the SEC power "to segregate and administer client assets in the event of a firm’s failure."
- The amended SEC Act "was passed on August 7, 2007, after the completion of the assessment" and "eliminates the uncertainties in TSD functioning as a settlement counterparty."

### Summary assessment — Observance of the Transparency Code in Monetary Policy
- The Bank of Thailand (BOT) has "a culture of monetary policy transparency" firmly established, but "further challenges remain in particular on the legal framework."
- High observance of transparency principles is primarily due to the BOT’s efforts to overcome legal shortcomings via a highly open process for formulating and reporting monetary policy.
- The objectives of monetary policy are "not defined in any of the Acts," which significantly weighs on transparency.
- While in practice the government does not interfere with BOT policy formulation and operation, the law allows the MOF authority over BOT operations and "the conditions under which the MOF is permitted to do so are not spelled out."
- The terms of office for the Governor and Deputy Governors "are not spelled out in legislation" and "the Governor can be removed from office by the Crown upon recommendation of the Cabinet," raising questions about role clarity between the BOT and the MOF.

### Recommended actions to improve monetary policy transparency
- Primary actions require legal amendments to:
  - the BOT Act;
  - the Royal Decree; and
  - the Currency Act.
- Most important specific recommendations:
  - "clarify the primary objective of monetary policy in the BOT Act;"
  - "assure the BOT’s full operational independence and accountability;"
  - "clarify the role of the MOF in BOT’s decision making process;" and
  - "spell out the terms of office of the Governor and Deputy Governors."
- Other recommendations (lower priority at this time):
  - "moving toward a consolidated balance sheet and income statement to further enhance overall transparency;"
  - BOT would benefit from having its financial account audited, in parallel, by an independent private accounting firm (currently audited by the Office of the Auditor General of Thailand, which is consistent with the Code).

### Progress on BOT law reform
- The BOT is in the process of amending the BOT Act.
- Proposed amendments "have been approved in principle by the Cabinet on February 27, 2007 and are now under review by the Council of State for legal clearance."

### Context and methodology of assessment
- The assessment covers BOT monetary policy transparency and forms part of the FSAP for Thailand conducted during 2007.
- The assessment was undertaken during the first FSAP mission in January 2007, with additional discussions during the second mission early June 2007.
- Main assessor: Ms. Jeanne Gobat of the Monetary and Capital Markets Department of the IMF.
- Information used for the assessment was available in January and March 2007 and included laws and regulations then in force, BOT publications, speeches, website material, authorities’ questionnaire responses and self-assessment, and discussions with authorities and financial sector representatives.

### Institutional framework and operational practices (key facts)
- The MOF is in charge of the BOT Act, the Currency Act and the Exchange Control Act; powers and duties under the Currency Act and Exchange Control Act have been delegated to the BOT.
- The Royal Decree under the BOT Act describes instruments, duties and transactions the BOT is authorized to conduct.
- The BOT is responsible for monetary policy, exchange rate policy implementation, foreign reserve management, exchange controls, and note and currency issuance.
- The BOT Act specifies a narrow mandate, expanded by the Royal Decree.
- Under practice since May 2000, the BOT has been implementing an inflation targeting (IT) framework.
  - The BOT targets the quarterly average core inflation range of 0–3.5 percent.
  - The Monetary Policy Committee (MPC) sets policy and signals shifts via announced changes in the key policy rate, the 1-day overnight RP rate.
- The exchange rate regime has been floating since July 2, 1997; the exchange rate is market determined though the BOT intervenes from time to time.

### Main findings (selected from Table 10 summary observance)
- Principle 1.1: Grading PO — "The BOT Act does not specify the objectives of monetary policy."
- Principle 1.2: Grading BO — "The institutional relationship between monetary and fiscal operations is not clearly defined."
- Principle 1.3: Grading O — "Agency roles performed by the central bank on behalf of the government are defined in the Royal Decree."
- Principle 2.1: Grading O — "The IT framework, objectives, targets and instruments of monetary policy are explained on the BOT’s website, the Annual Economic Report, the quarterly Inflation Report, reports of MPC decisions, and through other means."
- Principle 2.3: Grading O — "Changes in monetary policy are announced and explained in a timely manner" with MPC press releases posted on the BOT website same day.
- Principle 3.1: Grading O — "Thailand subscribes to the Special Data Dissemination Standards (SDDS) since 1996" and BOT data meet SDDS standards.
- Principle 3.2: Grading O — BOT publishes assets and liabilities every Friday with a one-week lag on the BOT website and annual balance sheet in the Annual Economic Report by July following the financial year end.
- Principle 4.2: Grading BO — "The BOT publishes its annual financial statements reviewed by the Audit Committee and audited by the Office of Auditor General of Thailand by July following the end of the financial year."

*IMF FSAP assessment excerpt as provided in the source PDF chapter.*

### 4.4 Standards for the conduct of personal

### 4.4 Standards for the conduct of personal financial affairs of officials and staff of the central bank and rules to prevent exploitation of conflicts of interest, including any general fiduciary obligation, should be publicly disclosed

### Assessment of existing rules and observance
- The BOT has code of conduct rules governing personal financial affairs of BOT officials and staff; rules to prevent exploitation of conflicts of interest; and code of conduct rules for the MPC members and BOT staff involved in the preparation of MPC meetings.  
- There is an internal regulation requiring BOT staff to report the purchase/sale of securities by themselves or their spouse to the BOT within 15 days after the transaction date. Violations of these rules are subject to sanctions.  
- Directors of the CoD are required to report and disclose their personal assets and liabilities to the National Counter Corruption Commission.  
- The code of conduct rules do not include disclosure for personal assets and liabilities for BOT senior officials. The disclosure rule applies only to Directors of the CoD.  
- There are no rules requiring:
  - the declaration of interest by directors,
  - requirement for directors to refrain from voting if they have interest in a decision, and
  - the notation of such declaration in the minutes of the BOT.  
- Aggregate observance labels referenced: Observed (O), broadly observed (BO), partly observed (PO), not observed (NO), not applicable (N/A).

### Recommended action (specific to standard 4.4)
- Disclosure rules should be set for personal assets and liabilities for senior officials of the BOT.

### Related recommended actions in Table 11 affecting governance and transparency (selected items as presented)
- 1.1.1: The primary objectives of monetary policy should be spelled out in the BOT Act.  
- 1.1.3: The BOT should have full instrument flexibility and control over its balance sheet to achieve the monetary objectives. The BOT should be allowed to issue its own instrument without prior approval of the MOF. The BOT should also be allowed to pay interest on uncollateralized deposits within its standing facility.  
- 1.1.6: The conditions for government intervention in the BOT’s affairs need to be spelled out and publicly disclosed, or, otherwise Section 14 should be removed from the BOT Act to enhance the transparency of BOT’s operational independence.  
- 1.1.7: The terms of office of the Governor and Deputy Governors need to be specified in the BOT Act.  
- 1.2.3: If the BOT intends to avail itself of the option to intervene in the primary government securities market in the future, the procedures for such participation should be clearly defined (e.g., noncompetitive bids) and publicly disclosed.  
- 1.2.4: The internally set overall credit ceiling on the BOT’s financial assistance program for the real sector should be disclosed as well as the reasons for the setting of the overall ceiling.  
- 3.2.1: The accounting standards applied (Thailand GAAP) should be disclosed consistently in the BOT’s Annual Economic Report. The BOT should aim at producing annual audited consolidated financial accounts that are consistent with its monthly reporting on gross international reserves. To this end, the Annual Economic Report would need to include the audited balance sheet and income statement of the Issues Department, the Currency Reserve and the Exchange Equalization Fund.  
- 4.2.1: Qualifications with regard to the BOT’s role in the FIDF assistance, the financial assistance programs to the real sector and the risk implications of these programs should be described in greater detail in the Annual Economic Report.  

### Authorities’ response (selected paragraphs)
- 94. Recognizing the shortcomings in the legislation establishing the BOT in providing a clear monetary policy framework, the BOT has taken extensive efforts to close these gaps through an open and transparent framework for monetary policy decision-making and monetary policy operations. In many cases, the BOT has gone above and beyond the requirements that have been stipulated in legislation in order to achieve these goals, particularly in terms of data dissemination and information disclosure.  
- 95. The BOT therefore welcomes the findings that monetary policy has been conducted in a transparent manner, which is crucial for the conduct of monetary policy under the inflation-targeting framework. The BOT also appreciates the recognition of the FSAP mission that such a high degree of transparency in formulating and reporting monetary policy has been the result of the BOT’s continuous and extensive efforts to achieve these goals.  
- 96. Given the importance of the legal framework underpinning transparent and credible monetary policy, the BOT has long been committed to addressing the remaining shortcomings in the legal framework with a view to defining the objectives of monetary policy as well as providing greater operational autonomy and accountability to the BOT. As acknowledged by the FSAP mission, the proposed amendment of the Bank of Thailand Act has already been approved in principle by the Cabinet. It is expected to be enacted by the Legislature within the term of this administration. Other key legislations are also in the pipeline.  
- 97. The BOT is determined to take additional steps to further improve transparency in the conduct of monetary policy in areas identified in the assessment. However, with regard to the issue of publication of BOT’s consolidated balance sheet and income statement, it is important to note that the Currency Reserve Account, as one of the components of the Issue Department, is wholly owned by the MOF, whereby the BOT is acting merely as a reserve manager. Therefore, a consolidated balance sheet and income statement, as recommended by the FSAP mission, would be neither practical nor appropriate. Nevertheless, the balance sheets of Issue Department and Banking Department are already published on a weekly basis in the Royal Gazette and the BOT website. In this connection, the BOT recognizes that further clarification on this issue to the public will help increase our overall transparency.

*Source: _cr09147 - 4.4 Standards for the conduct of personal*

### 115. BOT agreed with the assessment and appreciated to have had Thailand’s

### _cr09147 - 115. BOT agreed with the assessment and appreciated to have had Thailand’s

### Payment systems oversight (Bank of Thailand — BOT)
- BOT agreed with the assessment and appreciated to have had Thailand’s systemically important payment system, the BOT BAHTNET, reviewed by the IMF and the FSAP. The review was conducted professionally and cooperatively. (115)
- The Bankruptcy Law has already been in the process of amendment to ensure that transactions in BAHTNET cannot be revoked by the court order in the event of insolvency of the participant. (116)
- BOT is at the initial stage of implementing payment systems oversight and is formalizing the oversight methodology and procedures. (117)

### Recommendations for Securities Settlement Systems (summary)
- The assessment of TSD against the CPSS/IOSCO/RSSS demonstrates that the system to a large extent is sound, efficient and reliable, but essential measures are needed to:
  - strengthen the legal soundness of the system,
  - enhance its governance,
  - improve its communication network,
  - increase transparency of the system. (118)
- Specific concerns:
  - Netting arrangements should be legally valid even in the event of bankruptcy. (118)
  - Settlement and depository functions of TSD need protection from credit and liquidity risks inherent in the CCP function. (118)
  - There is a potential conflict of interest between providing CCP and CSD services; the most effective way to avoid a conflict of interest is to legally separate the CSD and the CCP functions. (118)
  - To reduce settlement risk, TSD should refrain from allowing debit balances of securities. (118)
  - TSD settlement and custody fees are bundled into total fees charged by the SET; TSD should have its own pricing structure and regularly review pricing levels against costs. (118)
  - Adequate regulatory and oversight frameworks should be put in place to allow the SEC to exercise regulatory tasks and the BOT to exercise oversight responsibilities effectively; cooperation between the SEC and the BOT should be substantially strengthened. (118)

### Information and methodology
- Assessment of the securities settlement system was undertaken in May 2007. Prior to the mission, the SEC conducted a self-assessment; Thailand authorities were fully cooperative; mission benefited from meetings with market participants. (119)
- Assessment covers TSD as the CSD and settlement system for equities, government bonds and corporate bonds traded on regulated markets and OTC. The assessment does not cover the CCP function of TSD; CCP should be assessed against CPSS/IOSCO recommendations for central counterparty. (119)

### Institutional and market structure — key statistics and facts
- Equity market size: US$112 billion at end of 2006, equivalent to 51 percent of GDP; number of listed companies: 518. Annual turnover value for 2006: US$111 billion. (120)
- Outstanding government bonds and bills at end-2006:
  - government bonds and bills: US$41.45 billion (18.81 percent of GDP),
  - government bills (separately noted): US$6.43 billion (2.92 percent of GDP). (120)
- Other outstanding instruments at end-2006:
  - state-owned enterprise bonds (government guaranteed): US$9.39 billion,
  - state-owned enterprise bonds (nongovernment guaranteed): US$4.46 billion,
  - state agency bonds: US$25.29 billion,
  - corporate bonds (mostly domestic private placement): US$23.98 billion. (120)
- Total trading value at 2006 year-end: US$120 billion with an average daily trading value of US$496 million. (120)
- Institutional facts:
  - SET is the only authorized regulated securities market; Market for Alternative Investment established in 1998 as a business unit of SET. TSD, a wholly owned subsidiary of SET, is the only clearinghouse and central securities depository and also acts as a CCP for equities. Members include securities companies, commercial banks, custodian banks, finance companies, BOT, and certain institutional investors. (121)
  - SEC, established in 1992 under the SEA, regulates securities businesses and is authorized to regulate and supervise securities clearing and settlement systems, but TSD is exempt from being regulated by the SEC; BOT currently does not have any active role in overseeing the clearing and settlement activities of the TSD. (122)

### Main findings — Legal framework (Rec. 1)
- The regulatory framework provides some legal protection for TSD operations; business relationships are based on contractual arrangements enforced by laws, but there is uncertainty whether netting arrangement is legally protected in the event of participant insolvency. (123)

### Main findings — Pre-settlement risk (Rec. 2–5)
- Trade confirmation and settlement cycles:
  - All trades between direct market participants are confirmed the same day and are settled T+3 for equities and T+2 for debt instruments. Technological improvements needed before further shortening the settlement cycle. (124)
- CCP issues:
  - TSD acts as a CCP for securities listed on the SET. No cost-benefit analysis has been carried out to introduce CCP for debt instruments. SEC encouraged to assess TSD CCP against CPSS/IOSCO recommendations. (125)
- Securities lending:
  - Securities lending and borrowing mechanism exists but activity is very low; allowing nonresidents to participate could enhance liquidity. (126)

### Main findings — Settlement risk (Rec. 6–10)
- Dematerialization:
  - Securities are issued in physical form with a relatively high share immobilized; moving to dematerialized/book-entry would reduce costs and improve efficiency. (127)
- TSD risk controls:
  - TSD has adequate risk control procedures including full collateralization for exposures above predetermined limits; lack of same-day buy-in facility leads to permitting debit balances in equities. (127)

### Main findings — Operational risk (Rec. 11)
- TSD has procedures to monitor, identify, and manage operational risk; issues handled by senior managers and checked by Managing Director; written contingency documentation and a “live” secondary site allow resumption of operations within a short period; business continuity plan and back-up facilities are subject to internal and external audit. (128)

### Main findings — Custody risk (Rec. 12)
- Technical and institutional arrangements ensure protection of customers’ securities: participants must segregate assets from customers and perform regular internal audits and reconciliations. (129)

### Main findings — Other issues (Rec. 13–19)
- Access and network:
  - TSD access criteria are objective and permit fair and open access; may open to foreign participants after appropriate risk management procedures. (130)
  - TSD uses a proprietary network that does not fully meet international procedures and standards. (130)
- Transparency and oversight:
  - TSD rules and contractual arrangements are publicly available; SEC intends to publish RSSS questionnaire answers on its website. (130)
  - SEC needs to rely on SET to influence TSD design and operation; TSD is not subject to BOT oversight; MOU between SEC and BOT for sharing information has not yet been implemented. (130)

### Summary of Observance (selected entries from Table 14)
- Legal risk:
  - Contractual arrangements enforceable under Civil and Commercial Code; netting arrangements can be challenged in bankruptcy. (Table 14)
- Pre-settlement and settlement:
  - Trade confirmation for regulated markets occurs same day between direct participants; settlement cycles: equities T+3, debt T+2; OTC negotiable but convention T+2. (Table 14)
  - TSD provides DVP facility and both intraday and end-of-day settlement finality. (Table 14)
  - TSD permits debit balances in securities; CSD functions are integrated with CCP exposing CSD to CCP principal risk; best practice is separation into distinct legal entity. (Table 14)
  - Cash leg settled in central bank money; settlement risk concentrated in three major banks. (Table 14)
- Operational and custody:
  - TSD has contingency plans, regular testing, and protection measures for customer securities including segregation and reconciliation. (Table 14)
- Governance, pricing, and communications:
  - SET appoints majority of TSD board, creating conflict of interest; access and exit criteria are public; TSD fees are aggregated with SET fees preventing benchmarking; TSD uses proprietary network for SET listings and SWIFT for government bonds; TSD has publicly disclosed the CPSS/IOSCO disclosure framework questionnaire. (Table 14)
- Regulation and oversight:
  - SEC lacks legal power to regulate and supervise TSD directly; TSD not subject to BOT oversight; SEC–BOT cooperation not fully effective. (Table 14)
- Links:
  - TSD has not established links to foreign CSDs. (Table 14)

### Recommended Action Plan (selected actions from Table 15)
- Legal risk (Rec. 1):
  - Implement adequate legal measures to ensure netting arrangement is legally protected even in event of participant insolvency. (Table 15)
- Pre-settlement risk (Rec. 2–5):
  - Carry out cost-benefit analysis on introducing CCP for debt transactions.
  - As immediate measure, subject CCP activities to SEC regulation and supervision.
  - SEC to assess TSD CCP function against CPSS/IOSCO Recommendations for CCP. (Table 15)
- Settlement risk (Rec. 6–10):
  - SEC and BOT should explore regulatory framework for dematerialized securities.
  - TSD should not credit participants’ securities accounts until settlement is final.
  - Consider separating CCP function from CSD function into distinct legal entity. (Table 15)
- Operational risk (Rec. 9):
  - SEC should receive copies of internal and external audit of TSD policy and procedures for operational risk. (Table 15)
- Custody risk (Rec. 12):
  - SEC and BOT should cooperate to ensure custodian banks implement necessary measures to protect customers’ assets. (Table 15)
- Other issues (Rec. 13–18):
  - TSD may consider opening its system to foreign participants.
  - Separate TSD pricing from SET to eliminate cross-subsidizing and increase transparency; implement procedures to regularly review pricing against costs.
  - Strengthen TSD governance by appointing more independent board members and removing SET’s “regulation power” over TSD.
  - Enhance proprietary network to meet international procedures and standards.
  - SEC should have legal power to directly regulate and supervise TSD without involvement of SET Board.
  - BOT should assume oversight responsibility of TSD and set up a dedicated oversight team.
  - SEC and BOT should develop a cooperation framework defining responsibilities, information exchange, and roles (e.g., BOT for systemic risk containment and clearing/settlement soundness; SEC for conduct, investor protection, governance, access, and transparency).
  - SEC and BOT should enhance staff capacity by setting up dedicated teams and providing courses, seminars and on-job training. (Table 15)

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09147.pdf*

### 131. The results of FSAP assessment on Thailand’s securities settlement system

### 131. The results of FSAP assessment on Thailand’s securities settlement system

### FSAP assessment findings
- The assessment against the CPSS/IOSCO recommendations reflects a highly satisfactory level of compliance.
- This level of compliance indicates that Thailand’s securities settlement system is on par with international best practices.
- Major weaknesses identified:
  - Coverage of SEC supervisory power over the TSD.
  - Efficiency in the TSD’s risk management and operations.

### Actions committed by TSD and SEC
- The TSD is committed to abolishing debit balances and implementing a same day buy-in and same day settlement facility upon participants’ failure by the end of this year.
- In response to the recommendation to separate the CCP function from the depository function to prevent conflict of interest and any risk impact on securities depositors, the SEC is in the process of requesting a technical assistance from the IMF to conduct a study on this matter.
- To increase transparency in the TSD’s pricing/cost structure and reduce the risk of cross subsidizing (since the TSD’s settlement and custody fees are currently included in the aggregate fees collected by its parent company, the SET), the TSD is reviewing its cost structure and in the process of unbundling its fees.
- The SEC recognizes a limitation in its legal power to directly regulate and supervise the TSD (without going through the Board of the SET). A draft amendment to the SEA had been proposed, passed the scrutiny of the Council of State, and was pending endorsement of the National Assembly. The proposed amendment, when effective, would give the SEC the power to directly regulate the TSD.

*Source: _cr09147 - 131. The results of FSAP assessment on Thailand’s securities settlement system*

### F. Summary Assessment of Observance of the Financial Action Task Force Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

### Introduction and scope
- The Report on the Observance of Standards and Codes for the FATF 40 Recommendations 2003 for AML and 9 Special Recommendations on CFT was prepared using the AML/CFT Methodology 2004.
- The assessment was carried out as part of a separate mission to Thailand from February 26 to March 13, 2007.
- The Detailed Assessment Report (DAR) was approved by the Asia-Pacific Group (APG) on Money Laundering plenary and agreed by the Thailand authorities.

### Executive summary — key findings
- Thailand has introduced measures in recent years to strengthen its AML/CFT framework, particularly for CFT.
- The regime has produced a very large number of suspicious transaction reports, a large amount of assets being seized, and contributed to the government’s objective of tackling drug crime.
- These achievements occurred despite outmoded legislation and other shortcomings identified in the DAR.
- Thailand is susceptible to ML and TF because illicit proceeds are generated from: drug trafficking, illegal gambling, theft, prostitution, human trafficking, illegal logging, corruption, and from crime in bordering countries; and because of a terrorist problem in its southern region.
- Estimates cited:
  - The illegal economy in Thailand has been estimated up to 13 percent of GDP.
  - ML predicate offenses estimated to generate illicit proceeds of up to five percent of GDP.
  - The widespread use of cash and a large informal sector estimated at up to 53 percent of GDP provide many avenues for laundering.

### Core legal framework and institutional arrangements
- The 1999 AMLA establishes core elements of Thailand’s AML/CFT regime:
  - Criminalizes ML by reference to eight predicate offenses.
  - Establishes the AMLO as Thailand’s financial intelligence unit (FIU).
  - Imposes some customer due diligence (CDD) obligations on a wide range of financial institutions (FIs).
  - Requires FIs to report transactions to the AMLO.
  - Creates a civil process for the AMLO to seize criminal assets and have them vested in the state.
- Weaknesses identified in alignment with international standards:
  - The AMLA does not fully criminalize ML in line with FATF recommendations; predicate offenses need extension.
  - The AMLO disseminates few reports to law enforcement agencies (LEAs) for criminal investigations and prosecutions due to an operational focus on civil seizure cases.
  - The AMLO does not allocate sufficient resources to properly analyze the STRs it receives and has an investigative unit focused on civil vesting processes rather than acting as an LEA.
  - Insufficient guidelines, feedback, and public awareness about ML and TF exist.
- Asset seizure and prosecution statistics:
  - Total asset seizures in Thailand since 1999 exceed US$250 million.
  - The AMLO has seized approximately US$30 million of assets each year and secured permanent vesting of approximately US$14 million per year under its civil processes.
  - On average, Thailand prosecutes just eight ML cases each year, obtaining convictions for three of those.
  - The prosecuted cases typically relate to self-laundering connected with drug offenses.

### Terrorist financing (TF)
- Financing of terrorism is criminalized under the Penal Code and is a predicate offense for ML under the AMLA, but not fully in line with international standards.
- The Penal Code offense of TF needs amendment to:
  - Extend to the financing of the acts set forth in the treaties in the annex of the UN TF Convention.
  - Fully cover the individual terrorist or terrorist organization.
  - Cover the mere provision or collection of property to a terrorist or terrorist organization.
  - Increase the sanctions for the offense of TF.
- Authorities do not appear to place sufficient reliance on investigating TF; no TF cases had been prosecuted to date.

### Preventive measures — financial institutions (FIs)
- Thailand’s preventive framework comprises the AMLA, ministerial regulations and other secondary legislation, and guidelines issued by supervisory authorities (“Notifications” or “Policy Statements”).
- Limitations hindering preventive measures:
  - Outdated legislation, a diverse range of institutions, and lack of clarity about regulator responsibilities.
  - Limited range of preventive measures in the AMLA covering the most important types of FI.
- Reporting and thresholds:
  - FIs must report to the AMLO: a) cash transactions over B 2 million (US$52,800); b) transactions connected with property worth more than B 5 million (US$132,000); and, c) suspicious transactions, regardless of amount.
  - The reporting system results in approximately 40,000 STRs each year, almost all from banks.
- Identified deficiencies in preventive obligations:
  - Customer identification does not extend to beneficial ownership, applies only to transactions that must be reported, and there is no obligation for ongoing due diligence or monitoring of the business relationship.
  - The threshold for occasional transactions of B 2 million (US$53,000) exceeds the US$15,000 amount permitted by the standard and cannot be justified compared to the average Thailand income level of US$3,000.
  - No requirement to report attempted transactions, and limited guidance for FIs on identifying suspicious transactions.
  - No requirement for enhanced scrutiny of transactions involving countries that do not or insufficiently apply the FATF Recommendations; no mechanism to apply counter-measures.
  - The AMLA does not apply to all FIs operating in Thailand — notably excludes authorized money transfer agents.
- Supervisory and enforcement issues:
  - No clear designation of competent authorities responsible for ensuring FIs comply with the AMLA; some institutions lack any supervision for AML/CFT obligations.
  - The BOT and the SEC (but not the Department of Insurance) carry out effective AML/CFT monitoring for FIs under their supervision, but their enabling legislation complicates imposing sanctions for non-compliance.
  - Consideration should be given to imposing criminal sanctions for significant breaches.
  - Amendments to the AMLA should delineate roles of the AMLO and financial supervisors and give appropriate powers for compliance examinations.
  - AMLO and financial regulators should establish effective MOUs for coordination and information sharing and raise awareness among FIs with improved guidance.

### Preventive measures — designated nonfinancial businesses and professions (DNFBPs)
- No AML/CFT requirements were in place for any categories of DNFBPs.
- Illegal casinos exist despite prohibition; Thailand needs to determine application of AML/CFT requirements to each DNFBP category prior to amending laws.

### Legal persons, arrangements, and nonprofit organizations
- The corporate registry system contains annually updated information about legal, but not beneficial, ownership of juristic persons.
- Consideration should be given to improving beneficial ownership information, including mechanisms to identify beneficial owners of bearer shares (permitted but unused).
- A review of laws and regulations relating to nonprofit organizations that can be abused for TF has begun and should be completed with appropriate mitigating steps taken.

### National and international co-operation
- The AMLA establishes the Anti-Money Laundering Board (AMLB) to oversee the AMLO and coordinate AML/CFT issues across government agencies, but improvements are needed for effective operation.
- The AMLO did not maintain and had difficulty obtaining some key information and statistics about ML/TF in Thailand; many officials appear to view ML narrowly as narcotics-related cash activity.
- International treaty status and obligations:
  - Thailand has signed, but not ratified, the Palermo Convention and has not fully implemented the Vienna Convention or the UN Terrorist Financing Convention; these deficiencies should be remedied promptly.
  - Thailand should implement specific measures to ensure terrorist property can be frozen without delay as required under UNSCRs 1267 and 1373.
- International cooperation strengths and limitations:
  - The AMLO has been a member of the Egmont Group of FIUs since 2001 and exchanges information with foreign FIUs.
  - Thailand authorities have enjoyed success in apprehending international criminals (notably the arrest of the terrorist known as Hanbali).
  - The narrow range of predicate offenses and deficiencies in the TF offense impede Thailand’s ability to cooperate internationally on ML and TF matters.

### Other issues and recommendations
- Authorities should prioritize reducing cash use and encourage greater participation in the formal sector to reduce ML and TF risks.
- The AMLO compiles extensive statistics and publishes some information in its annual report, but data collection and reporting could be improved.
- Steps recommended to improve data include better statistics on ML investigations, prosecutions, convictions, foreign assistance requests, and results relating to ML or TF investigations and terrorist/TF activities.

*Source: _cr09147 - 131. The results of FSAP assessment on Thailand’s securities settlement system*

### 161. There are good intentions and efforts of the authorities to bring Thailand into

### _cr09147 - 161. There are good intentions and efforts of the authorities to bring Thailand into

### Summary of assessment
- The DAR finds Thailand has good intentions and efforts to bring Thailand into compliance with the FATF 40+9 Recommendations, but full compliance "can only be achieved once the legislation that they are using to operate Thailand’s AML/CFT regime is amended to address the deficiencies identified in the DAR."
- Overall assessment in the DAR is described as acceptable, but Thailand authorities identified crucial areas needing further explanation.

### Prioritized key recommendations to improve the AML/CFT system (by theme and FATF Recommendation)
- Ratings and priority actions are provided in order of priority within each section. Ratings use the DAR scale: Compliant (C); Largely compliant (LC); Partially compliant (PC); Non-compliant (NC); Not applicable (NA).

1. General; Legal System and Related Institutional Measures
- Criminalization of Money Laundering (R. 1, 2 – Rating: PC, LC)
  - Amend the AMLA to extend the predicate offences to cover all serious offences, or all categories of offences, under the FATF 40+9.
  - Undertake more criminal prosecutions.
  - Amend the AMLA to make it absolutely clear that the offence of ML can be committed when any of the predicate offences take place outside of Thailand.
  - Improve statistics on ML investigations, prosecutions and convictions.
- Criminalization of Terrorist Financing (SR.II – Rating: PC)
  - Amend the Thailand Penal Code to make the TF conduct consistent with Thailand’s obligations under SR. II; to extend the TF offence to cover in all circumstances the provision or collection of funds for individual terrorists or terrorist organizations; to remove requirements that providing or collecting funds be for the purpose of committing a terrorist act or as part of a terrorist plan; and to increase the sanctions for legal persons committing TF.
  - Improve statistics on TF investigations.
- Confiscation, Freezing, and Seizing of Proceeds of Crime (R. 3 – Rating: LC)
  - Amend the law to enable the identification of, tracing of, and the voiding of actions that prejudice the recovery of tainted property.
  - Expand the Penal Code forfeiture provisions to deal with property derived from the proceeds of crime.
  - Improve consultation between the RTP, Department of Special Investigation (DSI), AMLO, and the ONCB regarding whether cases or asset seizures should be pursued civilly or criminally.
  - Pursue the obtaining of final forfeiture and vesting orders more rigorously.
- Freezing of Funds used for Terrorist Financing (SR. III – Rating: PC)
  - Establish effective procedures for considering de-listing requests and unfreezing the funds of de-listed persons or entities in a timely manner.
  - Establish procedures for authorizing access to property seized or attached that is necessary for basic expenses, the payment of certain types of fees, expenses and service charges, or for ordinary expenses.
  - Establish measures to monitor FI compliance with relevant legislation, rules, or regulations concerning the freezing and confiscation of terrorist property.

2. The Financial Intelligence Unit and Its Functions; Law Enforcement and Prosecution
- The Financial Intelligence Unit and Its Functions (R. 26 – Rating: PC)
  - Amend the AMLA so that the AMLO has specific authority to disseminate financial analysis to domestic competent authorities for investigation where ML or TF is suspected and carry out more dissemination.
  - Effectively abolish the AMLO “rewards system.”
  - Issue comprehensive guidelines for FIs about reporting suspicious transactions reports (STRs).
  - Publish information about ML trends and typologies in a more timely manner.
  - Establish a separate unit within the AMLO for compliance monitoring.
  - Improve the integrity of AML/CFT statistics produced by the AMLO.
  - Increase the AMLO’s budget and consider creating an asset forfeiture fund (or similar) to help fund the increase.
  - Consider recruiting the AMLO staff with financial sector expertise.
- Law Enforcement, Prosecution and Other Competent Authorities (R. 27, 28 – Rating: PC, LC)
  - Commit resources in the LEAs and National Counter Corruption Commission, including outside of Bangkok, to undertake ML/TF financial investigations during all predicate offence cases.
  - Increase training across Thailand on ML, financial investigations and investigating TF cases for police and prosecutors.
  - Improve statistics on predicate offence charges, asset seizures and forfeitures.
  - Develop closer relationships between LEAs and the AMLO.
  - Consider locating some DSI TF trained investigators in the south of Thailand to work closer with officials investigating terrorism incidents.
  - Publish trends and typologies relating to ML and TF cases.
- Cross Border Declaration or Disclosure (SR. IX – Rating: NC)
  - Expand the declaration/disclosure requirements to all circumstances set forth by SR. IX and extend it to “bearer negotiable instruments.”
  - Provide the Customs authorities with the power to stop, restrain, freeze and confiscate currency or bearer negotiable instruments, other proceeds of crime, and funds where there is a suspicion of ML or TF activity.
  - Improve cooperation and information exchange between Customs and the AMLO.
  - Create sanctions for cross-border transportation of currency related to ML/TF.

3. Preventive Measures – Financial Institutions
- Customer Due Diligence, Including Enhanced or Reduced Measures (R. 5, 6, 7, 8 – Rating: All NC)
  - Make each FI as defined in the FATF 40+9 glossary subject to the AMLA or justify each exclusion based on a robust risk assessment.
  - Amend the AMLA to fully incorporate the FATF CDD requirements.
  - Introduce enforceable requirements so that all FIs must carry out enhanced due diligence for higher risk customers, business relationships, or transactions.
  - Conduct a ML/FT risk assessment for the categories of transactions exempted from the requirements in the AMLA.
  - Redraft existing guidelines and policy statements concerning Personal Equity Plans.
  - Introduce enforceable obligations for all FIs to have policies and procedures to address risks from new technologies or nonface to face business.
- Third Parties and Introduced Business (R. 9 – Rating: NC)
  - Issue enforceable obligations consistent with Recommendation 9 for circumstances where the use of third party introducers is permitted.
- Financial Institution Secrecy or Confidentiality (R. 4 – Rating: C)
- Record Keeping and Wire Transfer Rules (R. 10, SR.VII – Rating: PC, NC)
  - Amend the AMLA to require all FIs to keep records and identification data for all transactions.
  - Regulate wire transfers in accordance with the requirements of SR. VII.
- Monitoring of Transactions and Relationships (R. 11, 21 – Rating: PC, NC)
  - Require all FIs to pay special attention to complex, unusual large transactions, or unusual patterns of transactions and record their findings in writing.
  - Introduce measures to deal with countries which do not or insufficiently apply the FATF Recommendations.
- Suspicious Transaction Reports and Other Reporting (R. 13, 14, 19, 25, SR.IV – Rating: PC, PC, C, PC, PC)
  - Expand reporting requirements to all FIs as defined by the FATF Glossary.
  - Introduce an obligation to report attempted transactions.
  - Evaluate the ML/FT risk for transactions for which reporting is exempted.
  - Provide more guidance to FIs on how to detect suspicious transactions.
  - Prohibit “tipping off,” and modify or delete section 21 of the AMLA.
  - Give more feedback to FIs about the STRs that have been reported.
- Internal Controls, Compliance, Audit and Foreign Branches (R. 15, 22 – Rating: PC, NC)
  - Require FIs to develop programs against ML and TF and to apply AML/CFT measures to foreign branches and subsidiaries.
- Shell Banks (R. 18 – Rating: PC)
  - Prohibit Thailand’s FIs from dealing with shell banks.
- The Supervisory and Oversight System–Competent Authorities and SROs (R. 17, 23, 25, 29, 30 – Rating: All PC)
  - Impose sanctions against FIs that breach AML/CFT requirements.
  - Conduct an assessment of the AML/CFT risks in the financial sector.
  - Ensure that all FIs without a proven low-risk of ML or TF are effectively regulated and supervised or monitored for compliance (including sanctions).
  - Strengthen regulation, supervision and enforcement of remittance activity.
  - Strengthen the measures in place to prevent criminals owning FIs.
- Money Value Transfer Services (SR. VI – Rating: PC)
  - Make all money transfer agents subject to the full range of FATF Recommendations applicable to them.
  - Take further efforts to suppress illegal remittance activities.
  - Investigate the illegal remittance flows to determine what improvements are needed to the framework governing remittance businesses.

4. Preventive Measures – Nonfinancial Businesses and Professions (DNFBPs)
- Customer Due Diligence and Record-keeping (R. 12 – Rating: NC)
  - Assess the ML and TF risks that apply in each of the DNFBPs.
  - Decide how to apply AML/CFT requirements to each of the DNFBPs and then make necessary amendments to the AMLA and other laws.
  - Carry out awareness raising with each of the DNFBPs.
- Suspicious Transaction Reporting (R. 16 – Rating: NC)
  - Amend the AMLA to introduce an STR regime for DNFBPs.
- Regulation, Supervision, Monitoring, and Sanctions (R. 24 & 25 – Rating: Both NC)
  - Introduce a regulatory and supervisory framework for DNFBPs.
- Other Designated Nonfinancial Businesses and Professions (R. 20 – Rating: PC)
  - Strengthen efforts to bring more financial activity within the formal sector.
  - Encourage more use of noncash payment methods.

5. Legal Persons and Arrangements & Nonprofit Organizations
- Legal Persons–Access to Beneficial Ownership and Control Information (R. 33 – Rating: PC)
  - Require more information on beneficial ownership/control to be available.
  - Introduce measures to ensure that bearer shares are not misused for ML.
- Nonprofit Organizations (NPO) (SR. VIII – Rating: NC)
  - Undertake a review of the adequacy of laws and regulations that relate to NPO that can be abused for the financing of terrorism.
  - Carry out outreach with the NPO sector about TF abuse.
  - Improve financial recordkeeping, supervision and monitoring of the NPOs with significant financial resources.
  - Designate an official contact point for foreign requests for NPO information.

6. National and International Cooperation
- National Cooperation and Coordination (R. 31 – Rating: PC)
  - Clearly designate an agency responsible for Thailand’s AML/CFT policies.
  - Review which agencies are represented at the AMLB and, if necessary, amend the AMLA to ensure that there is appropriate coverage.
  - Encourage the authorities to share more information amongst themselves concerning compliance by FIs of their AML/CFT responsibilities.
- The Conventions and UN Special Resolutions (R. 35, SR.I – Rating: Both PC)
  - Ratify the Palermo Convention.
  - Amend the Act on Mutual Assistance in Criminal Matters to limit the application of section 9(3) of the Act relating to political offenses.
  - Amend the TF offense as previously indicated.
  - Enact specific laws or procedures to freeze terrorist funds without delay.
- Mutual Legal Assistance (R. 36, 37, 38, SR.V – Rating: All PC)
  - Amend the ML predicate offenses and the TF offenses as previously indicated.
  - Amend the law to enable the rendering of assistance where the request relates to property of corresponding value.
  - Improve statistics on Mutual Legal Assistance Treaty (MLAT) requests, seizures, and types of offences involved.
- Extradition (R. 39, 37, SR.V – Rating: All PC)
  - Amend the Extradition Act to improve the process for prosecuting Thailand nationals where their extradition for a ML offence has been denied.
  - Amend the ML predicate offenses and the TF offense as previously indicated.
- Other Forms of Cooperation (R. 40, SR.V – Rating: LC, PC)
  - Demonstrate that international cooperation mechanisms are fully effective.

7. Other issues
- Resources and Statistics (R. 30 & 32 – Rating: Both PC)
  - Improve statistics in the following areas: ML investigations, prosecutions and convictions; TF investigations; predicate offence charges; asset seizures and forfeitures; and, MLAT requests, seizures, and types of offences involved.

### Authorities’ response (selected points)
- Legal System and Related Institutional Measures
  - Thailand has listed eight predicate offenses of money laundering in Section 3 of the AML law, and the authorities are now in the legislation process to extend the list to include eight additional categories of offenses.
  - The Government has adopted a policy of abolishing the reward system. Upon the abolishment, an Asset Fund will be set up to make available resources in support of the AMLO’s functions and AML/CFT activities.
- Preventive Measures Related to Financial Institutions
  - The AMLA and other regulations already contain key elements cited in Section 3 of the DAR as requirements for an effective regulatory and supervisory system.
  - By virtue of the AMLA 1999 and other enabling laws, the AMLO and the other competent authorities have the power to issue guidance, guidelines notifications, or regulations that are legally binding on regulated entities.
- National and International Cooperation
  - The AMLO has entered, as of July 17, 2007, into MOUs with 31 foreign FIUs concerning cooperation in the exchange of financial intelligence related to ML.
  - Thailand actively provides cooperation upon receiving requests from other countries where ML investigations are involved.
  - Thailand has also entered into a number of MOUs with other countries, which extend beyond criminal matters to defense and intelligence cooperation.
  - Domestically, the AMLO has entered into MOUs with domestic law enforcement agencies and other agencies in relation to the investigation of ML, the seizure and forfeiture of assets, the prosecution of ML, and the conduct of civil forfeiture cases by prosecutors from the Attorney General’s Office.
- Broad assurances
  - Thailand asserts: (1) Thailand has an AML/CFT regime for almost eight years now, functioning effectively, (2) Thailand’s mutual legal assistance and international cooperation record is a matter of high praise by the foreign counterparts, (3) Thailand’s asset forfeiture regime is operating to the benefit of the State, and (4) Thailand’s enthusiasm for bringing about a more effective and efficient AML/CFT system is truly appreciated by the world community.

### Appendix I: Main developments since the 1997 financial crisis
- Crisis impact and fiscal cost
  - The authorities estimate the gross fiscal cost of the crisis was equivalent to 33 percent of 2006 GDP.
- Macroeconomic and financial-sector improvements since the crisis
  - Managed floating exchange rate introduced; adoption of an inflation targeting framework; enhanced transparency of monetary policy.
  - Inflation has declined to the lowest level in decades, and has been kept within the BOT’s target range of 0–3.5 percent.
  - Interest rates have fallen; credit to the private sector has revived; exchange rate strengthened from end-1997 low levels.
  - Public debt burden has fallen to sustainable levels amid robust economic growth and a fiscal sustainability framework with fiscal rules.
  - Large current account surpluses helped halve the external debt burden.
  - International reserves have increased sharply since the crisis to now over US$80 billion, despite full repayment of the official financial support package, and sovereign risk premia are at a historical low.
- Regulatory and supervisory reforms
  - Prudential rules and regulations largely aligned with international standards; overall banking supervision significantly improved.
  - Risk management guidelines issued; onsite and offsite supervision strengthened and upgraded; a bank-by-bank early warning system implemented.
  - Considerable improvement in data collection and analysis of prudential indicators.
  - Some shortcomings remain that require legislative action outside the control of the BOT.
- Capital markets and corporate governance
  - Initiatives undertaken to deepen and broaden capital markets and strengthen corporate governance.
  - Efforts successful in broadening and deepening capital markets; size of the bond market doubled since the crisis.
- Box 3 — 1997 Financial Crisis and crisis management framework (selected facts)
  - The baht was floated on July 2, 1997.
  - In mid-1997, the government suspended operations of 58 out of 91 finance companies, accounting for about 12.5 percent of the financial sector; 56 of these were closed by end-1997.
  - The FRA, a state-owned AMC, empowerment of the BOT, and FIDF authority were among emergency measures in October 1997.
  - The government intervened in 12 additional finance companies in 1998 and intervened in 7 commercial banks (out of 15), accounting for one-quarter of financial sector assets.
  - TAMC was established in 2001 with special powers; state-owned AMCs managed B 854 billion in NPLs as of end-2006 and held foreclosed assets of B 114 million.
  - The cash recovery rate has been approximately 15 percent.
  - A total of B 1.4 billion of NPLs were transferred to state-owned AMCs (with intervened banks accounting for about 70 percent of that total).

*IMF staff report content unit _cr09147 - 161.*

### APPENDIX II: STRESS TESTS

### APPENDIX II: STRESS TESTS

### Overview
- Objective: assess the resilience of the Thailand banking system to a variety of severe but plausible shocks.
- Scope: eight largest Thailand commercial banks, which accounted for 88 percent of banking assets at end-2006.
- Approach: built on banks’ internal models and complemented by top-down models developed by the Bank of Thailand (BOT) and the FSAP team; exercises comprised single-factor shocks and macroeconomic scenario analysis.

### Single-factor shocks
- Sensitivity analysis covered market risk, interest-rate risk, and liquidity risk. Credit risk addressed in macroeconomic scenario analysis.
- Calibration: based on historical information (at least an entire economic cycle) and judgment; percentile-based calibrations used as noted below.
- Market risk shocks calibrated using the 99 percentile of the historical distribution with a 10-day holding period (average holding period of securities in banks’ trading book).
- Interest-rate risk on the banking book calibrated using the ninety-ninth percentile of the historical distribution with a one-year holding period (average holding period of banking-book assets and liabilities).

### Market risk stress tests (summary of Table 17: impact on CAR and shock sizes)
- Interest rate risk (THB yield curve / USD yield curve) — Size of shocks (in basis points) and reported average impact on CAR (in percent):
  - THB yield curve scenarios (size in <3 month / 3–12 month / >12 month; Average impact on CAR):
    - +75 / +75 / +75 → -0.04
    - -50 / -50 / -500 → 0.03
    - +50 / +75 / +100 → -0.05
    - -50 / -75 / -100 → 0.05
    - +100 / +75 / +50 → -0.04
    - -100 / -75 / -500 → 0.04
  - USD yield curve:
    - +50 / +50 / +50 → 0.02
    - -50 / -50 / -50 → -0.02
- Equity prices:
  - SET Decline → 200.00 (impact on CAR, in percent)
- Exchange rates (bilateral THB movements vs USD):
  - USD Depreciation → 90.00 (impact on CAR, in percent)
  - USD Appreciation → 100.00 (impact on CAR, in percent)
- Combination shocks:
  - Shock to THB yield curve and 20% fall in equity price (size +100 / +75 / +50) → -0.04 (impact on CAR)
  - Combination of largest impacts → -0.12 (impact on CAR)
- Note: interest rate stress tests also included EUR, GBP, HKD, SGD, JPY; single-factor exchange rate shocks also included MYR. Impact of these additional currencies was negligible.

### Interest-rate risk on the banking book (summary of Table 18: impact on CAR and shock sizes)
- THB yield curve (size in basis points across <3 month / 3–12 month / >12 month; Average impact on CAR in percent):
  - +250 / +250 / +250 → -2.73
  - -200 / -200 / -200 → 1.56
  - +75 / +150 / +300 → -2.21
  - -50 / -100 / -250 → 1.57
  - +300 / +150 / +75 → -0.99
  - -250 / -100 / -50 → -0.23
- Foreign-currency yield curve shocks (examples):
  - USD +150 / +150 / +150 → 1.06
  - USD -150 / -150 / -150 → -1.06
  - SGD +100 / +100 / +100 → 0.02
  - SGD -100 / -100 / -100 → -0.02
  - EUR +150 / +150 / +150 → 0.02
  - EUR -150 / -150 / -150 → -0.02
  - GBP +150 / +150 / +150 → 0.00
  - GBP -150 / -150 / -150 → 0.00
  - JPY +50 / +50 / +50 → 0.00
  - JPY -50 / -50 / -50 → 0.00
  - HKD +150 / +150 / +150 → 0.00
  - HKD -150 / -150 / -150 → 0.00

### Liquidity stress tests (summary of Table 19 and scenario design)
- Two liquidity shock scenarios designed based on a survey of commercial banks’ liquidity practices.
- Scenario 1: deposit loss assumptions (percent)
  - Retail (1–7 days) → 10
  - Retail (8 days–1 month) → 15
  - Wholesale → 30
- Scenario 2: Scenario 1 assumptions plus:
  - Access to interbank market limited to 50% of committed lines;
  - No access to uncommitted lines;
  - Haircuts applied to assets (asset haircuts, in percent):
    - T-bill → 3
    - Govt. & BoT → 5
    - SoE (MoF) → 7
    - SoE (non MoF) → 15
    - Corporate Debt (listed) → 20
    - Corporate Debt (non listed) → 40
    - Stock (SET 50) → 20
    - Other Instruments → 100
- Scenario results (Net liquidity position / deposits, in percent):
  - Scenario 1 Average → 15.9
  - Scenario 2 Average → 3.3
- Note in text: “Most Thailand banks, in particular the larger and more established ones, rely mainly on local deposits for funding their operations.” Text elsewhere states an assumed loss of 25 percent of retail deposits and 30 percent of wholesale deposits in one narrative description; Table 19 presents the scenario numeric breakdown above.

### Contagion analysis
- Contagion risk analyzed through banks’ exposures in the interbank market.
- Scenarios analyzed the failure of each one of the largest banks to assess system impact; main contagion channel identified as interbank exposures.
- Exposure to withdrawal of international credit lines was not considered given Thailand banks’ low balance exposure to this risk.

### Macroeconomic scenarios (summary of Table 20 and scenario design)
- Two macroeconomic scenarios: an external event (Scenario 1) and a domestic event (Scenario 2).
- Scenario 1: U.S. recession calibrated to have overall similar impact to sharp decline in U.S. growth in 2001; BOT projections for Thailand under Scenario 1:
  - GDP → 2007: 2.0; 2008: 3.0
  - Domestic demand → 2007: 2.4; 2008: 3.8
    - Private consumption → 2007: 1.2; 2008: 2.2
    - Private investment → 2007: 0.1; 2008: 0.8
    - Government consumption → 2007: 0.5; 2008: 0.3
    - Public investment → 2007: 0.7; 2008: 0.4
  - Net Exports → 2007: -0.4; 2008: -0.7
    - Exports → 2007: 1.0; 2008: 0.6
    - Imports → 2007: 1.4; 2008: 1.4
  - Exchange rate (eop) THB/USD → 2007: 33.4; 2008: 33.1
  - Headline inflation → 2007: 1.8; 2008: 1.2
  - Core inflation → 2007: 1.2; 2008: 1.1
  - Crude oil price (Dubai) USD/Barrel → 2007: 56.5; 2008: 56.0
  - Real estate prices → 2007: -2.0; 2008: 0.7
  - MLR → 2007: 7.4; 2008: 6.4
  - Repo rate (1 day) → 2007: 2.8; 2008: 1.8
  - Note: under Scenario 1, Thailand’s real GDP growth projected to fall to 2 percent in 2007, recover to 3 percent in 2008 and to 5 percent in 2009; BOT simulations indicated such severity corresponds to an event around the ninety-fifth percentile of the distribution of real GDP.
- Scenario 2: domestic policy and political uncertainty shock; BOT/FSAP assumption that recovery would be comparatively faster than in Scenario 1. Selected projections under Scenario 2 (Table 20):
  - GDP → 2007: 2.0; 2008: 4.0
  - Domestic demand → 2007: -1.1; 2008: 3.8
    - Private consumption → 2007: 0.2; 2008: 2.0
    - Private investment → 2007: -2.0; 2008: 1.4
    - Government consumption → 2007: 0.5; 2008: 0.3
    - Public investment → 2007: 0.3; 2008: 0.2
  - Net Exports → 2007: 3.2; 2008: 0.2
    - Exports → 2007: 3.1; 2008: 3.8
    - Imports → 2007: -0.1; 2008: 3.6
  - Exchange rate (eop) THB/USD → 2007: 35.2; 2008: 35.1
  - Headline inflation → 2007: 1.6; 2008: 1.3
  - Core inflation → 2007: 1.2; 2008: 1.3
  - Crude oil price (Dubai) USD/Barrel → 2007: 56.5; 2008: 56.0
  - Real estate prices → 2007: -2.0; 2008: 0.7
  - MLR → 2007: 7.4; 2008: 6.4
  - Repo rate (1 day) → 2007: 2.8; 2008: 1.8

### Bottom-up approach (bank-provided models)
- Eight banks generally used a bottom-up approach combining internal ratings, financial ratios and expert judgment to translate macro scenarios into portfolio risk factors.
- Methods across banks:
  - Four banks linked macro variables to borrower financial ratios using internal rating models for rated corporate portfolios, estimated rating migrations and recalculated provisions.
  - For unrated corporate and retail portfolios, approaches varied:
    - Some banks used a new benchmark PDs directly based on the highest NPL ratio over the past seven years.
    - Others applied econometric-based approaches using macro models by sector and by product type.
  - Two banks used financial ratios and expert judgment to re-classify loans as performing or nonperforming (one based largely on expert judgment and internal loan review guidelines; another based on key financial ratios and critical thresholds).
  - Two banks used approaches similar to the BOT/mission top-down macro-econometric model (one with a single-equation model; another with several econometric models by sector and counterparty type).

### Top-down approach (BOT and mission)
- Econometric model: dynamic panel data approach relating PDs to key macro-financial variables from the macro scenarios.
- Given unavailability of historical default-rate data, bank-level NPLs were used as proxies for default rates; historical NPL data adjusted for prior NPL transfers to asset-management companies.
- Stressed PDs combined with downturn loss-given-defaults and bank-provided exposures using Credit Risk + algorithm to compute portfolio-loss distributions, expected and unexpected losses, and tail risks; resulting estimates used to evaluate provisions and capital impact.

### Macro scenario stress-test results (summary of Table 21: CARNPL projections, percent)
- Projections assuming zero operating profits (CARNPL):
  - Bottom up: Scenario 1 Average 8.3; 2008 15.3; 2006 Average 12.7; 2006 Average 8.8
  - Top down: Scenario 1 Average 8.3; 2008 17.6; 2006 Average 12.7; 2006 Average 7.6
  - Top down: Scenario 2 Average 8.3; 2008 17.0; 2006 Average 12.7; 2006 Average 7.9
- Projections assuming nonzero operating profits (CARNPL):
  - Bottom up: Scenario 1 Average 8.3; 2008 15.3; 2006 Average 12.7; 2006 Average 11.4
  - Top down: Scenario 1 Average 8.3; 2008 17.6; 2006 Average 12.7; 2006 Average 10.2
  - Top down: Scenario 2 Average 8.3; 2008 17.0; 2006 Average 12.7; 2006 Average 10.5
- Sources: Commercial banks, BOT, and IMF staff.

### Bank-sector indicators and key statistics (selected entries from Table 22: Thailand FSIs)
- Capital adequacy:
  - Regulatory capital as percent of risk-weighted assets* → 2002: 13.6; 2003: 14.0; 2004: 13.0; 2005: 13.9; 2006: 14.1; 2007: 15.0
  - Regulatory Tier I capital to risk-weighted assets* → 2002: 10.0; 2003: 10.5; 2004: 10.0; 2005: 11.0; 2006: 11.6; 2007: 12.4
  - Capital as percent of assets* → 2002: 8.1; 2003: 8.9; 2004: 8.7; 2005: 10.0; 2006: 9.9; 2007: 10.5
- Asset quality:
  - Non-performing loans (NPL) as percent of gross loans* → 2002: 15.7; 2003: 12.9; 2004: 10.9; 2005: 8.3; 2006: 7.5; 2007: 7.3
  - Provisions + write-offs as percent of NPL → 2002: 66.1; 2003: 78.3; 2004: 77.7; 2005: 77.7; 2006: 77.1; 2007: 81.4
  - NPL net of provisions as percent of tier I capital* → 2002: 69.3; 2003: 38.7; 2004: 38.6; 2005: 25.7; 2006: 19.0; 2007: 16.6
- Liquidity and funding:
  - Liquid assets as percent of total assets* → 2002: 28.6; 2003: 23.6; 2004: 18.6; 2005: 16.4; 2006: 18.4; 2007: 20.3
  - Liquid assets as percent of short-term liabilities* → 2002: 41.3; 2003: 30.0; 2004: 23.8; 2005: 21.1; 2006: 22.9; 2007: 25.3
  - Deposits as percent of assets → 2002: 81.8; 2003: 80.8; 2004: 79.1; 2005: 78.2; 2006: 76.5; 2007: 73.7
  - Loans as percent of deposits* → 2002: 89.4; 2003: 87.3; 2004: 90.8; 2005: 91.0; 2006: 89.0; 2007: 93.9
- Profitability:
  - Net profits as percent of average assets (ROAA) * → 2002: 0.3; 2003: 0.7; 2004: 1.3; 2005: 1.4; 2006: 0.8; 2007: 0.3
  - Net profits as percent of average equity capital (ROAE) * → 2002: 3.4; 2003: 7.8; 2004: 13.3; 2005: 12.1; 2006: 7.1; 2007: 2.7
- Other indicators (selected):
  - Bank domestic credit (billion baht) → 2002: 4,603.5; 2003: 4,727.8; 2004: 5,116.1; 2005: 5,551.4; 2006: 5,738.4; 2007: 6,038.3
  - Consumer loans (billion baht) → 2002: 565.7; 2003: 658.2; 2004: 787.8; 2005: 989.8; 2006: 1,181.5; 2007: 1,409.9
  - Number of employees → 2002: 86,980; 2003: 87,671; 2004: 90,537; 2005: 99,786; 2006: 105,804; 2007: 111,128
  - Number of branches → 2002: 3,650; 2003: 3,730; 2004: 3,893; 2005: 4,230; 2006: 4,711; 2007: 5,054
- Source of Table 22: Data provided by Thai authorities. Indicators marked with * are core and encouraged set of indicators.

*Source: BOT and IMF staff; commercial banks; data provided by Thai authorities.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09147.pdf_