IMF published two reports and a technical note as part of the financial sector assessment in Thailand, under the IMF Financial Sector Assessment Program (FSAP). The technical note covers the risk assessment in the financial sector while the two reports address the detailed assessment of observance on the Basel Core Principles for Effective Banking Supervision (BCPs) and Insurance Core Principals (ICPs) in Thailand. Overall, the system in the country has been found to be generally compliant or largely compliant with BCPs and observant or largely observant on most ICPs.
The report on detailed assessment of observance of BCPs highlights that there have been significant enhancements to the legal framework and the supervisory process since the last BCP review, resulting in high compliance. Out of the 29 BCPs, Thailand was assessed compliant with 25 principles and largely compliant with four principles. The assessment was performed from October 25 through November 16, 2018 and is based on the regulatory and supervisory framework in place. The Thai authorities welcomed certain recommendations, which included enhancing clarity of internal guidelines for preventive actions and Prompt Preventive/Corrective Action and revising regulation on asset classification, which is to be implemented in 2020 once IFRS 9 becomes effective. The asset classification and provisioning regulation falls short of international good practice in some areas, but the impact is limited and a revised regulation that complies with the international good practice will come into effect soon. The revised regulation of BOT, which addresses the observed gaps, will be implemented once IFRS 9 becomes effective in 2020. This will also bring the Thai accounting standards for financial instruments fully in line with IFRS.
The report on detailed assessment of observance of ICPs provides an assessment of significant regulatory and supervisory practices in the insurance sector in Thailand. The current assessment is benchmarked against the ICPs issued by IAIS in October 2011, including revisions authorized up until December 2017. Out of the 26 ICPs, 10 ICPs were observed, 12 were largely observed, and four were partially observed. The ICPs that were partly observed are those on licensing, suitability of persons, changes in control and portfolio transfers, and cross-border cooperation and coordination on crisis management. The key recommendations in the report are intended to improve supervision follow for consideration by the Office of the Insurance Commission (OIC) and, where applicable, by other involved government agencies whose approval would also be necessary. The recommendations highlight that risk-based capital should include a provision for all relevant material risks. Moreover, supervisory measures regarding cross-border crisis management should be objectively applied based on stated criteria while the licensing, suitability, and control requirements should be reviewed and strengthened.
The technical note on risk assessment concludes that the resilience of the banking system in Thailand was assessed under a battery of stress tests performed by the FSAP. The solvency stress test indicates that the largest banks can withstand an adverse scenario broadly as severe as the Asian financial crisis. Banks also appear to be resilient to sizable withdrawals of liquidity, though some would face increased funding pressures. The liquidity stress test on investment funds showed that they would be able to withstand a severe redemption shock and the impact on the banks and the bond market would be limited. An analysis of the interconnectedness and contagion in the banking sector and in the financial system at large did not find any particular vulnerabilities. BOT has continued to improve its stress testing framework since its first top-down solvency macro stress test in 2017. While BOT has a wide range of well-structured data, there is room for improvement, particularly on the time series of Internal Ratings-Based banks’ Probability of Defaults and Loss Given Default and data management for liquidity risk to ensure the availability of more granular data, including a finer breakdown by type.
Keywords: Asia Pacific, Thailand, Banking, Insurance, Securities, Basel Core Principles, ICP, Stress Testing, LCR, IAIS, BOT, IMF
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