June 04, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Thailand. Directors agreed that the financial system remains sound and commended the authorities for measures taken to strengthen financial system stability. Directors broadly concurred that strengthening macro-prudential policy should help ensure continued containment of systemic risks. They also looked forward to the forthcoming FSAP, which will conduct a more comprehensive assessment of risks in the financial sector.

The staff report reveals that the banking sector resilience has strengthened further, with capital adequacy ratios being well above the regulatory requirements. However, loan-to-deposit ratio is relatively high and NPLS are contained. Vulnerabilities persist in some areas of the nonbanking sector, in particular in some cooperatives, but they are not expected to pose a systemic risk given their small size and limited linkages to the rest of the financial system. The forthcoming FSAP will conduct a further assessment of risks—including those related to vulnerabilities in nonbank financial institutions—financial stability, and macro-prudential policy frameworks. Macro-prudential policies can address pockets of vulnerabilities that might pose risks to financial stability. Building on IMF Technical Assistance, the macro-prudential policy framework is being strengthened through the development of systemic solvency and liquidity risk stress testing capacity. The framework could be further enhanced through the implementation of a counter-cyclical capital buffer and more extensive use of targeted loan-to-value (LTV) ratios. Strengthening the effectiveness of macro-prudential policy should ensure continued containment of systemic risks from search-for-yield behavior.

The staff assessment highlights that an important step toward strengthening the regulatory and financial stability frameworks was the designation of the five largest banks as systemically important banks (SIBs), which are required to hold additional capital. In addition, the authorities are moving toward integrated supervision of financial conglomerates that own SIBs. Since these banks typically have important nonbank financial subsidiaries, this conglomerate focus should help close regulatory gaps between the banking and nonbanking sectors. It involves enhanced collaboration among the key supervisory bodies—the Bank of Thailand, the Securities and Exchange Commission, and Office of Insurance Commission—through committee structures that support a more integrated assessment of financial risks. Finalizing arrangements for the resolution of financial institutions should also enhance system stability. Efforts to address AML/CFT shortcomings identified in the 2017 Asia Pacific Group Mutual Assessment Report are ongoing, including strengthening the risk-based supervision of AML/CFT, improving implementation of preventive measures, and enhancing information-sharing among supervisory bodies and the Anti-Money Laundering Office (AMLO).

The selected issues report shows that Thai financial market conditions do not appear to impair the monetary policy transmission mechanism. Strongly influenced by global factors, financial conditions in Thailand have been favorable over recent years, but have improved less than in ASEAN–4 neighboring countries. A dynamic stochastic general equilibrium model tailored to the Thai economy shows that a monetary policy focused on its traditional inflation and output objectives accompanied by a well-targeted countercyclical macro-prudential policy yields better macroeconomic outcomes than a lean-against-the-wind monetary policy rule under a wide range of assumptions.

 

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Keywords: Asia Pacific, Thailand, Banking, Article IV, FSAP, SIBs, Capital Buffers, IMF

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