Abstract
This Detailed Assessment of Observance on the Basel Core Principles (BCP) for effective banking supervision on Thailand highlights that there have been significant enhancements to the legal framework and the supervisory process since the last BCP review, resulting in high compliance. The commercial banking sector appears to be sound and stable with a diversified lending profile and a steady source of funding. The involvement of other ministerial authorities in Specialized Financial Institutions supervision may affect standard-setting processes and the mindset of key decision makers for commercial banks when trying to level regulatory standards. The supervisory framework and practices provide the foundation for the continued development of risk-based supervision. Notifications and examination manuals increasingly focus on analysis of qualitative factors such as governance, risk management and risk appetite statements to determine the bank’s composite rating. The report recommends that efficiency of enforcement actions would be increased by aligning Financial Institutions Business Act requirements and Bank of Thailand internal practices.
Summary Assessment
There have been significant enhancements to the legal framework and the supervisory process since the last Basel Core Principles (BCP) review, resulting in high compliance. The Financial Institutions Business Act (FIBA) was adopted in 2008 and establishes the Bank of Thailand (BOT) as the sole supervisor of commercial banks with powers of enforcement and narrowing the role of the Ministry of Finance (MOF) in supervision. The MOF grants and revokes licenses based on BOT recommendations; when BOT implements prompt preventive actions (PPA), the MOF must be notified ex-post.
The independence and reputation of the BOT may be negatively impacted by several factors. The factors include: (i) the permanent presence of the Director General of the Fiscal Policy Office (FPO) on the Financial Institutions Policy Committee (FIPC), which is not in line with international good practice; (ii) the presence of the Secretary-General of the Insurance Commission and the Secretary-General of the Securities and Exchange on the FIPC, and their participation in decisions also compromises operational independence and dilutes accountability; (iii) the legislation (BOT Act Section 42) appears to require Cabinet approval for the granting of Emergency Liquidity Assistance (ELA) to financial institutions that may seriously endanger the stability of the economic and monetary system; (iv) the BOT needs to notify the MOF after ordering action under the PPA or Prompt Corrective Action (PCA) framework; and (v) the negative net worth of the BOT exacerbates the risks to BOT’s independence and vulnerability to political interference.
The involvement of other ministerial authorities in Specialized Financial Institutions (SFIs) supervision may affect standard-setting processes and the mindset of key decision makers for commercial banks when trying to level regulatory standards. The involvement of the FPO and the State Enterprise Office (SEPO) on SFI supervision, and the only partial transfer of responsibilities to the BOT due to the need for Ministerial approval for two core functions of the supervisory role; (i) to take corrective action against SFIs, and (ii) to set legally binding SFI regulations, may lead to reputational risk to the BOT. The BOT is generally perceived as having full supervisory powers over SFIs, same as over commercial banks, which creates a misperception given the differences in BOT independent authority. Perception of market stakeholders is that there is now a leveled playing field.
BOT’s consolidated supervision and enforcement authority has been enhanced by FIBA implementation. FIBA provides for the supervision of banks and Financial Business Groups (FBG), on a consolidated basis. The repealed Commercial Banking Act did not address consolidated supervision. The PPA framework provides BOT with tools and measures to be applied based on the severity of the problem, and the PCA framework enables BOT to rectify a capital deficiency.
The supervisory framework and practices provide the foundation for the continued development of risk-based supervision. Notifications and examination manuals increasingly focus on analysis of qualitative factors such as governance, risk management and risk appetite statements to determine the bank’s composite rating. The BOT examinations address both quantitative (e.g., capital, liquidity, etc) as well as qualitative aspects (e.g., adequacy of board policies, quality of risk management, etc). To ensure that the Bank complies with notifications, transaction testing is performed to assess bank operations and processes. Inspection reports reflect a move-away from an audit approach and compliance approach. Issuance of best practices guidance and defining supervisory expectations would encourage the continued migration from auditing to risk analysis and facilitate corrective action based on qualitative factors. An additional pillar for the transition is ensuring that banks’ internal controls and audit adequately monitor and control transaction risk to enable BOT to increase reliance on their work.
Efficiency of enforcement actions would be increased by aligning FIBA requirements and BOT internal practices. In Chapter 5, FIBA outlines the measures available to BOT to effect corrective and preventive action, and the situations in which they may be applied. A determinant factor to support application of the measures is whether the situation may “cause damage to the public interest,” in which case, the MOF must be notified of the actions taken. As addressed in Section 92 of FIBA, the definition of causing damage to the public interest is broad and would require notification in most cases. The BOT issued the internal document, Guideline for Enforcement of PPA, and PCA (Guideline), which groups the measures in Chapter 5 and their application, and labeled them as PPA measures. In accordance with the Guideline, PPA will be applied to banks classified as “Weak” and causing damage to the public interest. Application of the measures, under FIBA Chapter 5, is not linked to the BOT bank classification system. However, in the Guideline, the BOT has linked application of the measures to the classification of the bank. The discrepancy makes the application more stringent under the internal Guideline. Chapter 5 measures are more effective if applied at an early stage, when vulnerabilities that may affect the bank’s condition are identified. The BOT has not had to invoke PPA as banks implement BOT recommendations (orders) communicated after supervisory activities.
The BOT’s corpus of regulations, guidelines, and supervisory manuals is comprehensive and enforceable and builds on international standards. The BOT sets conservative capital adequacy requirements (CAR), and foreign bank branches are required to hold regulatory capital like subsidiaries. There are comprehensive and detailed requirements for corporate governance and risk management, commensurate with the risk profile and systemic important of banks. BOT supervisors evaluate the effectiveness of risk management policies, processes, and practices on an ongoing basis and instruct banks to make corrections where appropriate.
The asset classification and provisioning regulation falls short of international good practice in some areas, but the impact is limited, and a revised regulation which complies with international good practice will come into effect soon. The definitions of restructuring and rescheduling and the current practices surrounding nonperforming loan (NPL) identification are weaker than international standards. The BOT supervisors are well-aware of these gaps in the regulation and perform in depth procedures to assess the weaknesses. Current provisioning levels are also high compared to international peers. The BOT’s revised regulation 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 Anti-Money Laundering Act was amended to strengthen requirements on banks. As evidenced by documentation provided during the assessment, there has been significant improvement in the anti-money laundering/combating the financing of terrorism (AML/CFT) supervision regime and banks have demonstrated more developed understanding and implementation of AML/CFT obligations e.g., the quality of suspicious transaction report (STR) filings has been shown strong improvement. A mutual evaluation review (MER) by the Asia Pacific Group identified gaps in the AML/CFT standards. For example, lawyers and attorneys are not covered, identification of beneficial owners is not always required to be identified, there is no explicit requirement for politically exposed person (PEP) source of wealth to be identified, and originator and beneficiary information for wire transfers is not required for transactions originated by non-customers of the bank. There is no requirement for filing STRs on transactions between government entities, including state owned enterprises (SOEs). Amendments to legislation addressing these shortcomings are undergoing the approval process.
Introduction
1. This assessment of the implementation of the BCP by the BOT is part of the FSAP undertaken by the IMF and the World Bank. The assessment was performed October 25 through November 16, 2018 and is based on the regulatory and supervisory framework in place at the time of this visit.
2. Compliance was measured against standards issued by the Basel Committee on Banking Supervision (BCBS) in 2012.1 Since the previous assessment, conducted in 2008, the BCP standards have been revised and reflect the international consensus for minimum standards based on global experience. The view is that supervision should be based on a process involving well-defined requirements, supervisory onsite and offsite determination of compliance with requirements and risk assessments, and a strong program of enforcement and corrective action and sanctions. The 2012 revision placed increased emphasis on corporate governance, on supervisors conducting reviews to determine compliance with regulatory requirements, and on thoroughly understanding the risk profile of banks and the banking system.
3. The assessors appreciated the high quality of cooperation received from the authorities. The mission extends its thanks to the staff of the BOT for its excellent cooperation and hospitality. The BOT provided a comprehensive and detailed self-assessment and granted access to supervisory manuals, onsite inspection reports, monitoring reports, and risk assessments.
Institutional and Market Structure— Overview
4. Thailand has a sizeable and diversified financial sector. The financial system assets amount to 259 percent of GDP (June 2018). Assets of Thailand’s 30 commercial banks (including 15 foreign branches or subsidiaries) account for 46 percent of financial sector assets, while 8 state-owned SFIs account for 15.6 percent. The three largest commercial banks account for 44 percent of banking sector assets. In 2017, the banking assets amounted to 125 percent of GDP, compared to 103 percent in 2007. Other segments of the financial sector have grown significantly. The market capitalization of the Stock Exchange of Thailand (SET) in 2017 was 96.6 percent of GDP, up from 67 percent of GDP in 2005 (and from 37 percent of GDP in 2008 at the depth of the international financial crisis). Likewise, insurance sector assets have grown from 10 percent of GDP in 2006 to over 25 percent of GDP in 2017 now constituting 9 percent of financial sector assets. Savings and credit cooperatives and credit unions represent about 6.5 percent of the financial sector assets.
5. The commercial banking sector appears to be sound and stable with a diversified lending profile and a steady source of funding. As of end-2017, the loan portfolio of the commercial banking sector was diversified and distributed among the following sectors: financial and insurance (23 percent); mortgages, real estate, and construction (20 percent); manufacturing (15 percent); consumer finance (14 percent); wholesale and retail trade (13 percent); and others (15 percent). To support banking sector activities, commercial banks have been traditionally funded by customer deposits, which represented more than 70 percent of total funding in December 2017. At the same time, banks have been consistently well capitalized, with an aggregate capital adequacy ratio above 15 percent over the last decade and reaching a peak of 18.5 percent in Q3 2017, well above the regulatory requirement of 8.5 percent, and with no banks below 15.5 percent. Commercial banks’ NPLs are also low at 3 percent (down from a peak of 6.8 percent in 2007) but have ticked up from 2.15 percent in 2014 primarily due to loans to the mining sector as well as wholesale and retail trade.
6. SFIs, savings and credit cooperatives, and credit unions provide a significant amount of financial services to households but experience weaker governance and supervision than commercial banks. SFI mandates focus on providing financial access to those who are underserved by commercial bank and provide some 25 percent of consumer loans (compared to 41 percent of consumer loans provided by commercial banks). The eight SFIs were recently (2015) brought under the supervision of BOT, but still do not face the same disclosure requirements or supervision regime as commercial banks. Their reported NPLs of 4.5 percent are higher than commercial banks. Likewise, their aggregate capital adequacy ratio (CAR) of 12.5 percent is lower than commercial banks but still above BOT regulatory requirement of 8.5 percent. There are 1,409 savings and credit cooperatives and 544 credit unions, which provide 16 percent of consumer loans. Risks are accumulating in this segment as the deposits and investment in securities continue to grow robustly due to search-for-yield behavior. Saving cooperatives invest the excess liquidity in long-term securities and long-term lending to other cooperatives that lack of liquidity. In addition, there is a maturity mismatch between the long-term assets and the short-term funding from borrowing from financial institutions and other savings and credit cooperatives. With the relative small size and limited linkage to other institutions in financial system, the saving cooperatives currently do not pose significant financial stability risks. However, risks are accumulating in this segment as debt rollover is allowed, and these institutions are monitored but not prudentially supervised by the Ministry of Agriculture.
Preconditions for Effective Banking Supervision
A. Soundness and Sustainability of Macroeconomic Policy
7. Since the last FSAP in 2008, the BOT has continued to conduct a managed float exchange rate regime and inflation targeting policy. Macroeconomic policies remain on the same regime and have been effective in preserving economic growth and maintaining price stability during periods of uncertainty. Thailand’s sound macro policy coupled with strong fundamentals, including a large build-up of international reserves and low foreign debt, shielded the economy from the global economic crisis in 2008–2009.
8. GDP growth in 2017 continued a positive trend, reaching 4.0 percent yoy in Q4. Headline inflation dropped below the target range in 2015–17, resulting from a decline in oil prices and falling core inflation, but is projected to rise along with stronger domestic demand and move toward lower bound of the target in H1/2018. Overall, financial conditions continue to be accommodative and conducive to economic growth. Financial stability remains sound but there remain pockets of risk, especially in search-for-yield behavior due to the prolonged low interest rate environment and low debt serviceability of households and small and medium enterprises (SMEs), which are been closely monitored. Thailand’s external position reflects a current account surplus and low foreign debt. International reserves stood at US$215 billion representing 50 percent of GDP as of Q1/2018, and low foreign debt.
9. The fiscal stance remains expansionary to support economic recovery. The fiscal deficit is expected to widen to support the expansion of public investment. Public debt to GDP registered at 41.2 percent at the end of 2017, below the fiscal sustainability framework of 60 percent. The Fiscal Responsibility Act B.E. 2561 (2018) was issued in 2018 to enhance transparency in the government budget process.
B. Financial Stability Policy Framework
10. The BOT assumes the leading role in safeguarding financial stability. The BOT monitors systemic risk and cooperates with the relevant supervisory authorities, primarily the Securities and Exchange Commission (SEC), the Office of Insurance Commission (OIC), and the FPO to ensure financial system stability with respect to financial institutions, financial markets, payments systems, and sustainability of macroeconomic policies.
11. There are several departments and committees within the BOT tasked with monitoring financial stability risks. In 2016, the BOT established the Financial Stability Unit (FSU) to monitor and identify areas of financial risk build-up and cross-cutting issues, drawing on sectoral surveillance conducted by different departments within the BOT as well as cooperate with other supervisory authorities by exchanging information and jointly conducting risk monitoring and assessments. The FSU develops the tools and capacity for financial stability assessments, undertaking the design of macroeconomic scenarios for stress testing, and developing a macroprudential toolkit and framework in preparation for policy functions. The FSU also acts as secretariat for financial stability meetings and is the editor of the Financial Stability Report.
12. The FSU and line departments meet regularly to discuss and assess financial stability issues both formally and informally. The sub-committee of Financial Stability holds formal, quarterly meetings chaired by the BOT Governor, during which risk assessments are discussed. In preparation for the sub-committee meetings, the BOT internal Financial Stability Working Group (internal FSWG) meets to discuss issues regarding financial stability and risk assessments. Assistant governors from financial stability-related line departments participate in the internal FSWG meetings, where the meetings are chaired by assistant governors of the Monetary Policy Group and Financial Institutions Policy Group with the Financial Stability Unit director as a secretary.
13. The BOT, SEC, and OIC coordinate financial system surveillance through the FSWG. These authorities also participate in the 3-Regulator Steering Committee, which reports to both the Committee and the Joint Meeting of the Monetary Policy Committee (MPC) and the FIPC. The SEC and the OIC are also members of the FIPC. Risks to financial stability are discussed and key issues consolidated at FSWG meetings. Key issues are then escalated to the Joint Meeting of the MPC and the FIPC as well as the 3-Regulator Steering Committee.
C. Well Developed Public Infrastructure
14. Thailand has a civil legal system based on case law, where the court decides a case based on an interpretation of statutory provisions. Under the Constitution, the sovereign power belongs to the Thai people. The King as Head of State exercises such power through the Parliament, the Cabinet, and the Courts. The Constitution is the supreme law of the State to which all legislative sources are subject. Enactment of a law could be done by the power of the Legislative Branch (Parliament) or through the Executive Branch (Cabinet). Subordinated law can be issued in the form of a Royal Decree, proposed by the Cabinet with the suggestion of the minister of the relevant ministry authorized under a specific act to set forth details under the guidelines of such act. Subordinated law can also be issued in the form of ministerial regulation by the minister who is authorized under a specific act to issue or change detailed regulations from time to time.
15. Courts in Thailand are classified into four categories: Constitutional, Administrative, Military, and the Courts of Justice. The Constitutional Court has powers and duties in adjudicating and ruling on constitutional cases. The Administrative Court tries and adjudicates administrative disputes between state organizations and the private sector, whereas the Military Court tries and adjudicates cases involving persons within its jurisdiction. The Courts of Justice try and adjudicate all cases including most of the business cases except those specified by the Constitution or other laws. The Courts of Justice are classified into three levels: Courts of First Instance (which comprise general courts, juvenile and family courts, and specialized courts), the Courts of Appeal (which consist of the Court of Appeal and nine Regional Courts) and the Supreme Court (which is the final court of appeal in all civil and criminal cases in the country).
16. The practice of law is in accordance with the Lawyer Act, the Judicial Service Act (the Judicial Service or the Court of Justice Act), and the Public Prosecution Organ and Public Prosecutor Act. Lawyers must obtain a license by passing an examination of the Lawyer Council of Thailand and become its member. Judges and public prosecutors must pass the examination of the Institute of Legal Education of Thai Bar Association. Thereafter, they will be recruited by the Judicial Commission or the Public Prosecutor Commission, as a case may be, through the examination arranged by them.
17. The Accounting Profession Act establishes the Federation of Accounting Professions (FAP) (October 2004) as a self-regulated entity aiming to promote and develop the accounting profession. The FAP has the power and responsibility to formulate accounting and auditing standards; develop a code of ethics; ensure that accountants and auditors act in compliance with laws and regulations; issue, suspend, or revoke auditing licenses; and issue the regulation for Continuing Professional Development (CPD). Thai Accounting Standards (TAS) and Thai Financial Reporting Standards (TFRS) are in line with the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), except for the standards covering financial instruments (IAS 32, IAS 39, and IFRS 7). The Thai Standards of Auditing (TSA) conform to the International Standards on Auditing (ISA). TASs and TFRSs are applied to all public companies, banks, insurance companies, securities companies, and mutual funds.
18. The BOT is empowered under the BOT Act to operate the payment systems and conduct activities to maintain payment systems stability. BAHTNET (The BOT Automated High-Value Transfer Network) is the only large value payment system (LVPS) operated on real time gross settlement basis and is considered as a Systemically Important Payment System (SIPS). BAHTNET, owned and operated by BOT, provides inter-institution funds transfer service for financial institutions and provides final settlement to net clearing positions from retail payment systems such as cheque clearing (ICAS) and interbank retail funds transfer system (ITMX). Under the BOT Act, the Payment Systems Committee (PSC) is established and empowered to formulate policies about the payment systems under supervision of the BOT and inter-bank clearing systems to ensure their efficiency and stability and to monitor the BOT’s related activities. The PSC acts as both the oversight board of the payment systems and the FMI’s board for BAHTNET. The PSC performs other oversight functions such as establishing supervisory policies and the oversight framework. As an FMI Board, the PSC oversees the operations and key performance of BAHTNET and approves the risk management framework for the BAHTNET’s operations.
19. The National Credit Bureau (NCB) is the single private credit bureau in Thailand banks can join. The NCB is the result of the 2005 merger by the Thai Credit Bureau and Central Credit Information Services. The NCB is governed by the Credit Information Business Act B.E. 2545 (2002) and aims to gather loan data from financial institution members and in return offers reliable credit data of both consumers and corporates for financial institutions to analyze credit risk of the borrowers. As of June 2017, the NCB had 96 members including banks, nonbanks, leasing companies, and saving cooperatives. Currently, the NCB encourages more numbers of saving cooperatives and other financial institutions to join the membership as to improve data coverage. Since May 2017, the NCB has been offering NCB scores for both consumers and SMEs to members, which could be incorporated into their internal credit scoring.
20. The legal framework specifies duties and responsibilities of, and grants authority to, supervisory agencies to oversee financial safety net mechanisms. The BOT, the SEC, and the OIC are responsible for supervising, issuing policies, and resolving entities under supervision in the financial institutions (commercial banks, finance companies, and credit foncier companies) sector, capital market, and insurance sector, respectively. The BOT performs the duty as “a lender of last resort” of financial institutions in accordance with the BOT Act; while the Deposit Protection Agency (DPA) is responsible for deposit protection.
21. The Deposit Protection Act B.E. 2551 (DPA Act) was passed in 2008, establishing the DPA supervised by the MOF. The DPA acts as a paybox-plus2 and has three primary objectives as stated in the deposit protection law: (i) to provide protection for deposits in financial institutions; (ii) to enhance confidence and stability in the financial institution system; and (iii) to manage financial institutions subject to control under the Financial Institutions Businesses Act and liquidate financial institutions whose licenses have been revoked. Membership under the DPA scheme is compulsory for all financial institutions, comprising commercial banks (both local and foreign), finance companies, and credit foncier companies; currently, there are 35 member institutions. The maximum annual premium rate that members remit to the Deposit Protection Fund cannot exceed 1 percent of the average value of eligible deposits at the insured institution; at present, the annual premium rate is 0.01 percent. As of end-2017, the size of the Deposit Protection Fund was THB 120.03 billion. This represents around 3 percent of insured deposits.
22. The DPA protects Baht deposits and accrued interest of both individuals and legal persons. The types of accounts under DPA protection include current accounts, savings accounts, fixed deposit accounts, certificates of deposit, deposit receipts, and other deposit accounts under different names with obligations to pay back depositors. However, Non-Resident Baht Accounts (NRBAs), derivative-embedded deposits, and interbank deposits are excluded from the deposit protection scheme.
23. Several measures have been taken by the SEC in collaboration with the SET and the Thai Institute of Directors (IOD) to enhance corporate governance standards. Examples of these measures are the requirement that companies obtain approval to issue and offer for sale securities to protect investors from unfair practices and ensure the availability of adequate information for making investment decision in accordance with international standards and the Investment Governance Code for institutional investors.
24. For financial institutions and financial business groups, the BOT focuses on enhancing corporate governance and management systems. In May 2018, the BOT revised the regulations on (i) fit and proper criteria of the director, manager, person with power of management, and advisor of the financial institution; (ii) the directors’ responsibilities in financial institution management; (iii) the establishment of the board of directors and subcommittees including their composition, qualifications, and responsibilities; and (iv) disclosure of information. Moreover, the BOT has recently revised the Handbook for Directors of Financial Institutions to be in line with the changing environment by focusing on the roles and responsibilities of the board for each aspect of governance.
Main Findings
A. Responsibilities, Objectives, Powers, Independence, and Cooperation (CPs 1–3, and 13)
25. The BOT has clear objectives and the necessary legal powers to conduct ongoing supervision, address compliance with laws, and undertake timely corrective actions to address safety and soundness concerns for banks. In the areas where the BOT recommends and the MOF approves (licensing, revoking a license and approving non-Thai shareholders and directors), there have been no instances where the MOF has not followed the BOT’s recommendations.
26. The current mix of roles in SFI supervision and regulation between the MOF and the BOT, increases the BOT’s reputational risk as a result of potential political interference that could spill over to its role as the regulator and supervisor of banks. There are eight SFIs in Thailand, each with a different mandate assigned by its founding law. Four SFIs are deposit-taking institutions and comply with the definition of a commercial bank in accordance with FIBA. The SFIs are regulated and supervised by the BOT with extensive involvement of the State Enterprise Policy Office (SEPO) as owner and the Fiscal Policy Office (FPO) as policy maker. The minister of finance has delegated large parts of supervision to BOT but not the corresponding powers to take corrective action against problems in SFIs or to set legally binding SFI regulations without ministerial approval. This incomplete transfer of responsibilities exposes the BOT to reputational risk that could affect its role as regulator and a supervisor of banks.
27. FIBA provides a framework for the BOT to set minimum enforceable prudential standards for banks and banking groups as well as guidance to clarify good practices. The BOT issues banking notifications that are subordinate legislation of FIBA and considered as law. The BOT guidance is not considered as law since the BOT issues it without referring to a statutory provision. Guidance is usually released to apply industry best practice in areas such as risk management. Thai banks have not challenged the non-binding nature of the BOT’s guidance and have complied with all orders and recommendations imposed by the BOT examiners based on this guidance. To better explain its policy positions and further strengthen its standing in the international supervisory community, the BOT should publish more comprehensive response papers to public consultations on important notifications instead of, or in addition to, attaching brief questions and answers to the notifications.
28. The BOT is well resourced, has transparent processes for the appointment and removal of the governor and members of its governing body, and has adequate legal protection for its staff. The process for the appointment and removal of the governor and the members of the FIPC is transparent, and the BOT has adequate resources for the conduct of effective supervision and appropriate training plans. Discussions with supervisors and banks confirmed that BOT staff have credibility based on their professionalism and integrity. The BOT regularly benchmarks its salary scales to the market and has sufficient funding to cover cross-border inspections and training. The legal framework for banking supervision includes adequate legal protection for the supervisors.
29. Rotations of frontline supervisory staff appear to occur as a matter of practice. These should be formalized in policy and enforced within the supervision groups to ensure adequate rotation in supervisory staff. Relationship managers and their teams should be rotated to other (supervisory) roles after 3–5 years of supervising the same institution or banking group. While there should be room for flexibility in the rotation policy, a maximum period that any supervisor can be assigned to the same institution should also be established.
30. While the assessors did not observe evidence of a lack of independence, there are a few factors that have the potential to interfere with the BOT’s independence. First, the permanent presence of the Director General of the Fiscal Policy Office (FPO) on the FIPC is not in accordance with international good practice. Second, the presence of the Secretary-General of the Insurance Commission and the Secretary-General of the Securities and Exchange on the FIPC, and their participation in decisions also compromises operational independence and dilutes accountability. Third, Section 42 of BOT Act requires that when a financial institution faces a liquidity problem that may seriously endanger the stability of the economic and monetary system, the BOT, after approval of the FIPC and the Cabinet, may approve the granting of a loan or financial assistance to that financial institution. Hence, any ELA to a D-SIB is likely to fall under Section 42, expose the BOT to political interference, and delay the process. Fourth, the BOT needs to notify the MOF in case it applies the PPA framework and the Prompt Corrective Action. Finally, even though the BOT has continued to discharge its duties for many years despite negative net worth, its weak financial position further exacerbates the risk to the BOT’s independence and vulnerability to political interference.
31. Parts of the SFI supervision and regulation were recently transferred to the BOT, and SFIs are supervised by a separate department that reports to the Assistant Governor of the Supervision Group, same as the commercial bank supervision departments. In other words, SFI and commercial bank regulatory and supervisory actions are decided by the same staff, following the same procedures. Considering their significantly differing degrees of independence, it is not unlikely that contamination seeps through and that matters arising in the SFI area spill over to the commercial bank decision-making process, particularly because some commercial banks also have state ownership.
32. Formal and informal arrangements for domestic and international cooperation have been established and function well in practice. Domestic coordination at senior levels occurs through cross directorship of the FIPC and the 3-Regulators Steering Committee. At the working level, various working groups have been established and hold regular meetings, including domestic supervisory colleges. These arrangements are formalized in Memorandums of Understanding (MOUs) and allow the exchange of confidential information, based on the FIBA provisions. The foreign exposures of Thai banks are small; nevertheless, the BOT has concluded MOUs with most host supervisors and has provided the assessors with evidence of effective cooperation.
B. Methods of Ongoing Supervision (CPs 8–10, and 12)
33. The supervisory process is well established. BOT bases its supervisory scope on a risk-based analysis of the banks. Banks are supervised by a team of examiners under a relationship manager (RM); the team is responsible for onsite examinations and offsite analysis. The process is flexible, enabling BOT to promptly respond to a changing environment by: (i) decreasing reliance on an annual onsite examination or expanding offsite analysis and communications with banks, resulting in ongoing monitoring; (ii) expanding the use of early warning indicators (EWI); and (iii) incorporating the possible impact of macroeconomic trends into the supervisory scope.
34. Effective follow-up ensures that recommendations from BOT are implemented. Recommendations in examination reports are discussed with senior bank management and a copy of the report is sent to the bank’s board. Date for responses are established and examiners follow-up as part of their offsite ongoing monitoring. Numerous examples of examination reports follow-up were shared with assessors.
35. A bank’s risk profile is reflected in a composite rating. Banks are analyzed and, based on their risk profiles, governance and operating policies, are assigned forward-looking ratings covering the significant activities that may have an impact on financial condition and performance. At the completion of the analysis, the bank is also assigned a composite rating that aids supervisors in developing their supervision plans. The BOT can further leverage its risk analysis by increased targeting of activities to areas of higher risk and more narrowly scoping annual onsite examinations, as appropriate.
36. The BOT’s consolidated supervision powers have been significantly enhanced. FIBA was amended to include consolidated supervision over banking groups and FBGs. FIBA grants the BOT authority to approve the establishment of FBGs, require changes in their structure if it impedes proper supervision, and to supervise the bank, its parent, subsidiaries, and affiliates as if they were the same juristic person. The BOT maintains detailed organizational charts of all FBGs and their ultimate beneficial owners.
37. The BOT supervisory framework and practices provide the foundation for the continued development of risk-based supervision. Notifications and examination manuals increasingly focus on analysis of qualitative factors such as governance, risk management and risk appetite statements in determining the bank’s composite rating. The BOT onsite examination has focused both on the quantitative (e.g., capital, liquidity) as well as qualitative aspects (e.g., adequacy of board policies, quality of risk management). Morever, to ensure that the Bank complies with the BOT notifications, transaction testing is performed to assess bank operations and processes. Inspection reports are moving away from past audit and compliance approaches. Issuance of best practices guidance and defining supervisory expectations would encourage the migration from auditing to risk analysis and facilitate corrective action based on qualitative factors. An additional pillar is ensuring banks’ internal controls and audit adequately monitor and control transaction risk.
C. Corrective and Sanctioning Powers of Supervisors (CP 11)
38. The BOT has available a broad range of possible measures to timely address safety and soundness issues, but BOT internal procedures could be enhanced. As currently described under the Guideline, PPA measures are applied to banks classified as “weak” and which “would cause damage to public interest.” Chapter 5 of FIBA defines and provides the BOT authority to apply the measures addressed in the BOT Guideline but does not link their application to the bank classification. Chapter 5 very broadly defines actions causing public damageand requiring notification to the MOF. The BOT is of the opinion that Chapter 5 measures may be applied and not require MOF notification. Amending the Guideline to clarify that Chapter 5 measures may be applied independent of a specific bank classification and also clarifying the need to notify MOF would increase effectiveness and clarity for supervisors.
39. Aligning FIBA, the Guideline and the BOT practice would expedite application of PPA. It is a good practice to have internal guidelines that put in practice legal and regulatory requirements. Banks promptly respond to the BOT inspection report recommendations (orders) and the BOT has not had to apply stronger measures. However, situations change, and now is a good opportunity to issue a notification and amend the Guideline accordingly to clarify the BOT authority to implement PPA and the circumstances. The Guideline has integrated the financial triggers according to the early warning system (EWS) aligning it with PPA/PCA. Additionally, the BOT is enhancing qualitative elements such as the quality of risk management into triggers.
D. Corporate Governance (CP 14)
40. The BOT’s corpus of regulations, guidelines, and the corporate governance supervisory manual are comprehensive, enforceable, and in line with international good practice. The BOT has been updating its governance regulation to keep up with the development of international good practices. At the assessment date, the BOT regulation with regards to corporate governance of financial institutions have already been enhanced at solo basis by the newly issued regulation, which has been in effect since June 2018. For FBG, the enhancement to the governance requirement will be in effect from May 2019 onwards. In the meantime, the governance of FBG follows the existing BOT notification no. FPG 8/2560 on supervision of corporate governance of financial business group which covers almost all aspects of effective governance. The enhancement to the corporate governance regulation aims to strengthen management systems, transparency, and market discipline by reinforcing the BOT’s expectation of (i) responsibility of the parent company board on oversight of subsidiaries, and (ii) composition of the parent company’s board and subcommittees.
41. Similarly, some requirements of the corporate governance regulation are still subject to transitional and grandfathering measures and are not yet enforced at the assessment date. For example, independent directors that have been in service for more than nine years will be grandfathered till May 2022. The requirement for a risk oversight committee also comes into effect on May 1, 2019.
E. Prudential Requirements, Regulatory Framework, Accounting, and Disclosure (CPs 15–29)
42. The BOT determines that banks have comprehensive risk management processes, including effective board and senior management oversight, to identify, measure, evaluate, monitor, report, and control all material risks on a timely basis. The BOT has comprehensive and detailed requirements for various risk categories (credit risk, market risk, operational risk, liquidity risk, and IT risk) which include conservative assumptions and are linked to capital adequacy requirements. The BOT also requires the development of, and reviews, banks’ contingency plans. The risk management supervision process is commensurate with the risk profile and the systemic importance of banks. The BOT supervisors evaluate the effectiveness of risk management policies, processes, and practices on an ongoing basis and instruct financial institutions to make corrections where appropriate. As a risk-based supervisor, the BOT should better articulate its supervisory expectations by publishing best-practice guides, after thematic reviews or when a diverging range of practices is observed, for example on risk management and governance. This will also contribute to the international standing of the BOT as a world class prudential supervisor.
43. The BOT sets conservative capital adequacy requirements, the components of capital absorb losses and the capital requirements are in line with Basel III. The average CET1 ratio for D-SIBs sits around 15 percent and 16 percent for non-D-SIBs. Foreign bank branches are required to hold capital like domestic banks. Three banks can use internal models for credit risk, and two foreign bank branches have been accredited to use the market risk internal model approach. The BOT has a well-staffed specialized team that accredits and oversees modelling by banks. Even though the BOT has the power to set individual capital ratios and will require a 1 percent add-on for D-SIBs by 2020, it has not yet tailored capital ratios to the risk profile of individual banks. The BOT should build on its risk-based supervisory framework to develop a methodology that facilitates individual capital ratios, at least for its largest and most complex banks.
44. Parts of the credit risk and asset classification requirements fall short of international good practice, but the impact is limited due to strong supervision practices and high provisions. The BOT’s definition of restructuring and rescheduling is not in line with the definition of forbearance in international good practice; it should include financial difficulty of the borrower, and it should not be conditioned on the bank making a loss. Also, the probation period for restructured exposures to be upgraded is currently three months, while international good practice requires it to be a minimum of one year. The BOT regulation also allows an upgrade of the exposure to take place when restructuring or rescheduling is granted. Moreover, there is also no limit on the number of times banks can reschedule or restructure (evergreening). Furthermore, the regulation should be more detailed on the level of application of the asset classification (borrower or transaction level). Finally, banks should be required to include a list of indicators to determine the “unlikeliness to pay” in their policies. The BOT supervisors are well-aware of these gaps in the regulation and perform in-depth procedures to address these weaknesses. Current provisioning coverage levels are standing at 140 percent, high compared to international peers.
45. The BOT has issued a revised regulation to be implemented after TFRS 9 becomes effective in 2020, which should address most of the shortcomings identified above. That is, the assets will be classified into 3 classes: performing, under-performing, and nonperforming. For assets classified as performing, provisions shall be set against expected credit losses over a 12-month period, while for assets classified as under-performing and nonperforming, provisions shall be set against expected credit losses over the expected life. The revised regulation was not in force at the time of the assessment but is expected to address most of the weaknesses listed above.
46. A detailed related-party lending legal framework has been established. The definition of related party is broad and provides significant latitude for the BOT to use supervisory judgment. Directors, senior managers and persons with power of management are not permitted to borrow from the bank. The BOT closely monitors related party transactions and reviews intra-group lending.
47. Country, liquidity, market, interest rate, and operational risks are monitored under a fully-developed and comprehensive regulatory framework. Basel guidance is followed in the monitoring of these risks, and the data collected and analyzed by BOT provides a comprehensive overview that feeds the risk dashboards. Cross-border lending and establishments are increasing and highlight the need for close monitoring of risk appetite statements and growth strategies.
48. At the assessment date, the Thai accounting standards are generally in line with IFRS. The BOT’s asset classification and provisioning standards used in banks’ financial statements are more conservative provisioning standards than IAS 39. Quantitative impact studies have revealed that the quantitative outcomes of the current BOT provisioning standards are closer to IFRS 9. The latter will be fully implemented in 2020.
49. The mutual evaluation review by the Asia Pacific Group disclosed areas for improvement in AML/CFT supervision. The Anti-Money Laundering Office (AMLO) is the primary regulator but BOT also plays an important role. The MER identified gaps in the AML/CFT standards. For example, identification of beneficial owner is not always required to be identified, there is no explicit requirement for PEP source of wealth to be identified, and originator and beneficiary information for wire transfers is not required for transactions originated by non-customers of the bank. There is no requirement to file STRs for transactions between government entities, including SOEs. Amendments to legislation are undergoing the approval process to address these shortcomings.
Detailed Assessment
50. The assessment of compliance of each principle will be made based on the following four-grade scale: compliant, largely compliant, materially noncompliant, and noncompliant. A “not applicable” grading can be used under certain circumstances. While gradings in self-assessments may provide useful information to the authorities, these are not mandatory as the assessors will arrive at their own independent judgment.
Compliant: a country will be considered compliant with a Principle when all essential criteria3 applicable for this country are met without any significant deficiencies. There may be instances, of course, where a country can demonstrate that the Principle has been achieved by other means. Conversely, due to the specific conditions in individual countries, the essential criteria may not always be sufficient to achieve the objective of the Principle, and therefore other measures may also be needed in order for the aspect of banking supervision addressed by the Principle to be considered effective.
Largely compliant: A country will be considered largely compliant with a Principle whenever only minor shortcomings are observed that do not raise any concerns about the authority’s ability and clear intent to achieve full compliance with the Principle within a prescribed period of time. The assessment “largely compliant” can be used when the system does not meet all essential criteria, but the overall effectiveness is sufficiently good, and no material risks are left unaddressed.
Materially non-compliant: A country will be considered materially non-compliant with a Principle whenever there are severe shortcomings, despite the existence of formal rules, regulations and procedures, and there is evidence that supervision has clearly not been effective, that practical implementation is weak, or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. It is acknowledged that the “gap” between “largely compliant” and “materially non-compliant” is wide, and that the choice may be difficult. On the other hand, the intention has been to force the assessors to make a clear statement.
Non-compliant: A country will be considered non-compliant with a Principle whenever there has been no substantive implementation of the Principle, several essential criteria are not complied with, or supervision is manifestly ineffective.
51. In addition, a Principle will be considered not applicable when, in the view of the assessor, the Principle does not apply given the structural, legal, and institutional features of a country.
52. Unless the country explicitly opts for any other option, compliance with the Core Principles will be assessed and graded only with reference to the essential criteria. As a second option, a country may voluntarily choose to be assessed against the additional criteria, in order to identify areas in which it could enhance its regulation and supervision further and benefit from assessors’ commentary on how it could be achieved. However, compliance with the Core Principles will still be graded only with reference to the essential criteria. Finally, to accommodate countries that further seek to attain best supervisory practices, a country may voluntarily choose to be assessed and graded against the additional criteria, in addition to the essential criteria.Thailand has opted for assessment he against the essential and additional criteria.
53. The detailed Principle-by-Principle self-assessment should provide a “description” of the system with regard to a particular Principle. The template also includes spaces for a grading or “assessment,” and a “comments” section, if the country opts to include a grade in its self assessment.
The “description” section of the template should provide information on the practice in the country being assessed. It should cite and summarize the main elements of the relevant laws and regulations. This should be done in such a way that the relevant law or regulation can be easily located, for instance by reference to URLs, official gazettes, and similar sources. Insofar as possible and relevant, the description should be structured as follows: (i) banking laws and supporting regulations; (ii) prudential regulations, including prudential reports and public disclosure; (iii) supervisory tools and instruments; (iv) institutional capacity of the supervisory authority; and (v) evidence of implementation and/or enforcement or the lack of it.
The “assessment” section, if the country opts to include the grade in the self-assessment, should contain only one line, stating whether the system is “compliant,” “largely compliant,” “materially non-compliant,” “non-compliant,” or “not applicable” as described above.
The “comments” section will be used by the assessors to explain why a particular grading was given, in particular when a less than “compliant” grading was given. This could be structured as follows: (i) reasons related to the state of the laws and regulations and their implementation; (ii) the state of the supervisory tools and instruments, for instance reporting formats, EWS, and inspection manuals; (iii) the quality of practical implementation; (iv) the state of the institutional capacity of the supervisory authority; and (v) enforcement practices. In case of a less than “compliant” grading, this section will be used to highlight which measures would be needed to achieve full compliance, or why, notwithstanding the system seems compliant based on laws, regulations, and policies being in place, yet a less than “compliant” grading was given, perhaps due to weaknesses in procedures or implementation. Countries choosing not to include grades in the self assessment can use this section to introduce additional information, in particular make reference to planned initiatives aimed at amending existing practices, or legislation and regulation still in draft.
Thailand: Detailed Assessment
Thailand: Detailed Assessment
| Principle 1 | Responsibilities, objectives, and powers. An effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups.4 A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorize banks, conduct ongoing supervision, address compliance with laws, and undertake timely corrective actions to address safety and soundness concerns.5 |
| Essential criteria | |
| EC1 | The responsibilities and objectives of each of the authorities involved in banking supervision6 are clearly defined in legislation and publicly disclosed. Where more than one authority is responsible for supervising the banking system, a credible and publicly available framework is in place to avoid regulatory and supervisory gaps. |
| Description and findings re EC1 | The BOT is the sole authority responsible for banking supervision. The responsibilities and objectives related to banking supervision are stipulated in two Acts as follows:
The FIPC is established, under the BOT Act, to formulate and execute policies in supervision of financial institutions as well as to monitor the BOT’s operations regarding banking supervision (Section 28/10). The FIPC consists of the BOT’s governor as the chairman, the Director-General of the Fiscal Policy Office, the Secretary-General of the OIC, the Secretary-General of the SEC, and five experts appointed by the BOT Board (Section 28/9). FIBA empowers the BOT to regulate banks, including foreign bank branches and banks, which are foreign banks’ subsidiaries, in all stages of the banking business life cycle, including the licensing process and ongoing operations, except for issuance and revocation of a license, which shall be exercised by the Ministry of Finance on recommendation of the BOT. To be more specific, the BOT is empowered by FIBA as follows: i. Sole authorities to the BOT
There are four deposit-taking SFIs not included in the scope of the BCP. Nonetheless, Section 120 of FIBA which is now declared in Royal Thai Government Gazette and currently legally effective provides the statutory ground for the MOF to assign the BOT as regulator and supervisor. In December 2014, the Cabinet approved the BOT to be the regulator of SFIs with the following duties: (i) issuing regulations for SFI supervision with approval of the MOF; (ii) reviewing the fit and proper criteria for directors and senior management; (iii) supervising through onsite and offsite monitoring; and (iv) providing effective enforcement. With the objective to define the supervisory roles, the MOF issued Ministerial Order Nr 433/2558, dated April 2, 2015, to assign the BOT with the supervision of eight SFIs according to Section 120 of the FIBA. This allows BOT to carry out the four mandates as prescribed by the Cabinet and empowers BOT to perform its roles, including prescribing regulations for SFIs supervision through the enforcement of FIBA, but with the approval of the MOF, and reporting SFI supervision outcomes to the MOF. Hence, the BOT regulates and supervises the SFIs, but its regulations and corrective actions must still be approved by the MOF. All related laws, acts, regulations, and notifications are required to be published in the Government Gazette. |
| EC 2 | The primary objective of banking supervision is to promote the safety and soundness of banks and the banking system. If the banking supervisor is assigned broader responsibilities, these are subordinate to the primary objective and do not conflict with it. |
| Description and findings re EC2 | The primary role of banking supervision is to maintain safety and soundness of banks and the financial institution system (BOT Act Section 7). The BOT has other duties and responsibilities such as promoting consumer protection (Section 39 of the FIBA), promoting financial inclusion, and providing financial literacy to the public. These are clearly subordinate to the BOT primary objective to maintain the financial institutions system stability. This can be seen from the structure of the BOT and the prominence given to the departments that are responsible for fulfilling the primary objectives and the duties of banking supervision, including the Regulatory Policy Department, Financial Institution Applications Department, and four Banking Supervision Departments. In 2016, the BOT established the Financial Consumer Protection and Market Conduct Department separate from the Banking Supervision Departments. |
| EC3 | Laws and regulations provide a framework for the supervisor to set and enforce minimum prudential standards for banks and banking groups. The supervisor has the power to increase the prudential requirements for individual banks and banking groups based on their risk profile7 and systemic importance.8 |
| Description and findings re EC3 | The BOT is empowered by FIBA to issue prudential policies and requirements for banks and banking groups. In addition, the BOT has the power to increase the prudential requirements for individual banks (Section 30). In practice, prudential standards are issued as notifications, guidelines, or circulars. Notifications are applied either on a solo or consolidated basis and are binding. Guidance notes are not binding, but in case a bank does not comply with the BOT’s guidance, the BOT will implement several measures such as stating recommendations in the bank’s examination report or considering its composite rating. FIBA empowers the BOT to set prudential standards for banks such as capital adequacy ratios, liquidity requirements, single lending limits or large exposures, investment limits, asset classification and provisions, related lending, and consolidated supervision, etc. i. Maintenance of Capital Funds and Assets
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| EC4 | Banking laws, regulations, and prudential standards are updated as necessary to ensure that they remain effective and relevant to changing industry and regulatory practices. These are subject to public consultation, as appropriate. |
| Description and findings re EC4 | Banking laws, regulations, and prudential standards are updated to ensure the effectiveness of banking and banking system supervision in line with both domestic circumstances and international standards. After the 1997 financial crisis, the Commercial Banking Act, B.E. 2505 (1962) was replaced by FIBA which came into force in 2008. FIBA was updated in B.E. 2558 (2015), in response to emerging prudential issues, namely, the granting of credits to a bank’s directors, managers, deputy managers, assistant managers, persons holding an equivalent position under a different title, persons with power of management, and any related person of those persons in the case where the credits were approved prior to holding these positions. In addition, the BOT Act was amended in 2018 to implement a bank resolution framework for dealing with distressed banks whose failure may have systemic impact. The new framework aims to ensure that problem banks are addressed in a timely and orderly manner and costs to the public are minimized. In a crisis, the BOT proposes a resolution scheme to the MOF and the Cabinet for approval. Once approved, the FIDF is then empowered to implement it. The BOT has also consistently updated notifications concerning current concerns in supervision of banks and the banking system and has withdrawn outdated notifications. Other than following the BOT’s usual practice in reviewing existing notifications regarding the changing environment and banking business developments, the BOT has also reviewed notifications following the Royal Decree on Revision of Law B.E. 2558 (2015). The Royal Decree requires to have the review of law every five years as from the date that law comes into force or on the following grounds. It is deemed appropriate to improve, revise, or repeal law if:
Public consultation Before banking laws and regulations come into force, the BOT arranges a hearing with stakeholders on the consultation draft of the laws or regulations. The process is in accordance with Section 77 of the Constitution, including the Royal Decree on Revision of Law B.E. 2558 (2015), which requires the authority to hold a public consultation. The Royal Decree’s implementing guidelines require the State agency drafting any acts to have acts heard and commented by the public via the State agency’s website for at least 15 days. The hearing process shall provide any related information such as rationale of having the acts. Generally, all draft laws in Thailand are processed through the Council of State which acts as an advisory body in providing legal advice for the government. The Council of State usually arranges public consultations by post or electronic mail on all draft laws and publishes them on its own website (http://www.krisdika.go.th/wps/portal/general), so that they can be conveniently accessible, observed, and commented by the public. The BOT usually has a 30-day consultation periods with banks. Banks expressed overall satisfaction with the BOT’s consultation process and timelines, particularly with the publication of “questions and answers” as part of the notifications. |
| EC5 | The supervisor has the power to:
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| Description and findings re EC5 | (a) Section 71 of FIBA gives the BOT full access to banks’ and banking groups’ boards, management, staff, and records, such as:
The BOT has not yet appointed an auditor or specialist to conduct a special examination. (b) The BOT’s power to review overall banking group’s activities
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| EC6 | When, in a supervisor’s judgment, a bank is not complying with laws or regulations, or it is or is likely to be engaging in unsafe or unsound practices or actions that have the potential to jeopardize the bank or the banking system, the supervisor has the power to:
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| Description and findings re EC6 | The BOT is empowered by FIBA to act on banks that do not comply with the laws or regulations or engage in unsafe or unsound practices or actions that may jeopardize the banks or the banking system, including the following actions; (a) Timely corrective action
Where a bank violates or fails to comply with FIBA, or stipulations or notifications issued under FIBA, or rules attached to the license, the BOT has the discretion to impose wide range of sanctions on the bank as follows;
In the case that BOT orders the closure of a bank, the BOT shall propose to the Minister to withdraw the license. (Section 93 95 and 97) (d) Cooperate and collaborate with relevant authorities To achieve an orderly resolution of the bank, the BOT is empowered to cooperate and collaborate with relevant authorities such as the Ministry of Finance, the DPA, the SEC, the OIC, the Office of the Attorney General, or National Police Bureau. For example, if the BOT orders any bank to be placed under control, according to Section 102 of FIBA, the BOT shall issue a notification of the appointment of a Control Committee consisting of a chairman and other members of at least two but not exceeding four, provided that at least one member shall be proposed by the Deposit Protection Agency. The FIPC provides a forum for the BOT to coordinate and engage with other supervisors and authorities in resolution planning and actions. In normal times, the FIPC convenes regularly to discuss issues in relation to banking supervision and monitoring including emerging risks and concerns. In times of crises, the FIPC has a decision-making role regarding the resolution scheme. The BOT has also signed a Cross-border Cooperation Agreement (COAG) with relevant home and host supervisory and resolution authorities of a G-SIFI, due to the potential systemic relevance of its operations in Thailand. Such arrangement provides a basis for coordination in crisis preparations and facilitates communication during business as usual and in times of crises. (Please refer to CP3 / CP13 for more details) |
| EC7 | The supervisor has the power to review the activities of parent companies and of companies affiliated with parent companies to determine their impact on the safety and soundness of the bank and the banking group. |
| Description and findings re EC7 | As mentioned in EC5, the establishment of the financial business group requires prior approval from the BOT (Section 54) and the BOT has the power to review the overall activities of a banking group as if they were the same legal person (Section 57). Under consolidated supervision, the BOT is empowered to supervise different forms of financial business groups, namely, a group with financial institution as a parent company and a group with non-financial institution (holding company) as a parent company. In addition, to ensure that the controller of the banking group satisfies the fit and proper criteria, the appointment of a director, manager, person with power of management or advisor of the parent company of a financial institution and its subsidiaries undertaking financial business, requires prior approval from the BOT (Section 55). Refer to CP12 EC5 and AC1 for more details). |
| Assessment of Principle 1 | Compliant |
| Comments | The BOT has objectives and the necessary legal powers to conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns for banks. In the areas where the MOF decides based on recommendation of the BOT (licensing of a bank, revoking a license, and approving non-Thai shareholders and directors), there have been no instances where the MOF has not followed the BOT’s recommendations. Although, the BOT has been delegated statutory power in supervising SFIs according to section 120 of FIBA and three supervisory authorities have agreed to develop a framework for responsibilities of each party, there still be a mix of roles in practice. Furthermore, the BOT is empowered to issue SFIs’ regulations with approval of the MOF but not corresponding powers to take corrective action against problems in SFIs. This incomplete transfer of responsibilities may potentially expose the BOT to reputational risk especially when an SFI encounters problems. This is resulting from a misperception of its supervisory role in the banking system since the BOT is may be perceived as having full supervisory powers over the SFIs. This weakness has been considered in the assessment of CP 2. Thai banks have not challenged the non-binding nature of the BOT’s guidance and have complied with all recommendations imposed by the BOT examiners based on this guidance. Banks also expressed overall satisfaction to the assessors with the consultation process and timelines. Based on the discussions of this CP, the assessors suggest that, where appropriate, the BOT should publish response papers to consultations on important notifications instead of, or in addition to, attaching questions and answers to the relevant notification. This would give the BOT an opportunity to better explain its policy positions in writing. It would also further strengthen the international standing of the BOT in the regulatory community, clarify and give more prominence to BOT policy positions. |
| Principle 2 | Independence, accountability, resourcing, and legal protection for supervisors. The supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable for the discharge of its duties and use of its resources. The legal framework for banking supervision includes legal protection for the supervisor. |
| Essential criteria | |
| EC1 | The operational independence, accountability and governance of the supervisor are prescribed in legislation and publicly disclosed. There is no government or industry interference that compromises the operational independence of the supervisor. The supervisor has full discretion to take any supervisory actions or decisions on banks and banking groups under its supervision. |
| Description and findings re EC1 | The operational independence, accountability and governance of the BOT are prescribed in legislation and publicly disclosed as follows: Firstly, to achieve operational independence, the BOT Act clearly states that the BOT is a legal person which is a state agency and is neither a government agency nor state enterprise under the law on budgetary procedure and other laws (Section 5). In this regard, the BOT is self-financed and thus does not rely on government funding and its budget is under the responsibility of the BOT Board (Section 25(1)). Furthermore, the BOT Act clearly specifies that the Governor shall be independent in the management and administration of the BOT’s affairs (Section 28/16). He has specific term of position for five years (Section 28/18) and shall not be revoked from the position without explicit cause as specified in Section 28/19 of the BOT Act. Secondly, to ensure accountability, the BOT Board and the FIPC are established under the BOT Act (Section 17) to undertake the BOT’s tasks set out under Section 8. Th BOT Board and FIPC powers and duties are clearly prescribed in the BOT Act:
Fourthly, it is explicitly stated in the BOT Act that the Chairman of the BOT Board, the experts of the BOT Board, the experts of the FIPC, and the Governor shall not be a director or holding any position in a financial institution. (Section 18 Section 26 and Section 28/17 of the BOT Act). The power to grant and revoke a banking license is exercised by the MOF on recommendation of the BOT. Under FIBA, the BOT is empowered to appoint its officers or external persons as bank supervisors (Section 85 of FIBA) and to take supervisory actions when any financial institution violates or fails to comply with requirements in the Act. (Division 5 of FIBA: Rectification of condition or operation of financial institution). FIBA grants the BOT power to propose to the Minister to revoke a banking license (Sections 83, 90 (5), 93, 95, 97, 110, and 111) including, among other things, cases where the bank fails to comply with the BOT’s corrective order, fails to maintain capital funds above the level required by law, or when the bank’s operations may cause damage to the public. Any financial institution intending to dissolve or suspend its operation shall obtain prior approval from the BOT (Section 78). |
| EC2 | The process for the appointment and removal of the head(s) of the supervisory authority and members of its governing body is transparent. The head(s) of the supervisory authority is (are) appointed for a minimum term and is removed from office during his/her term only for reasons specified in law or if (s)he is not physically or mentally capable of carrying out the role or has been found guilty of misconduct. The reason(s) for removal is publicly disclosed. |
| Description and findings re EC2 | The process for the appointment and removal of the BOT Board, the Financial Institutions Policy Committee and the Governor, including their terms of office are clearly specified in the BOT Act as follows. Board The BOT Board members consist of the Chairman appointed by His Majesty the King, the Governor, three Deputy- Governors, the Secretary-General of the Office of the National Economic and Social Development, the Director-General of the FPO, and five experts appointed by the Minister (Section 24). To ensure that the process for the appointment of the Chairman and the experts is transparent and there is no government intervention, section 28/1 stipulates the selection process. The Minister shall appoint a selection committee comprising seven members to select the members of the BOT’s Board. At the time of the appointment and during their duties, the selection committee shall not be a political official and have no personal benefit or interest in contravention to the duties imposed by this Act. The selection committee shall vacate from office when the selection process and the appointment of the experts to be a Chairman or experts has been completed (Section 28/4). The Financial Institutions Policy Committee (FIPC) The members of the FIPC consist of the Governor, as the Chairman, two Deputy-Governors determined by the Governor; one of which shall be assigned by the Governor to be a Deputy-Chairman, the Director-General of the FPO, the Secretary-General of the Insurance Commission, the Secretary-General of the SEC and five experts appointed by the BOT Board (Section 28/9). The Chairman of the BOT Board, the experts of the BOT Board and the experts of the FIPC shall hold office for a term of three years and may be reappointed but shall not hold office for more than two consecutive terms (Section 19 and Section 26). In addition to the term expiration, any experts of the Board shall vacate upon (Section 20 and Section 26):
The Governor The Governor is appointed by His Majesty the King upon the recommendation of the Cabinet. To that the process for the appointment of the Governor is transparent and there is no government intervention, section 28/14 lays out the Governor selection process. In this regard, the Minister of finance shall appoint a selection committee consisting of seven members who have held previous positions stipulated under Section 28/1 functioning to nominate not less than two suitable persons to be selected as a Governor. The selection committee shall vacate from office when the selection process and appointment of the Governor has been completed. The Governor shall hold office for a term of five years and may be reappointed for not more than one term (Section 28/18). In addition to the term expiration, the Governor shall be removed from office for reasons specified under Section 28/19.
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| EC3 | The supervisor publishes its objectives and is accountable through a transparent framework for the discharge of its duties in relation to those objectives.9 |
| Description and findings re EC3 | As mentioned in CP1, the BOT Act and FIBA are the main laws governing the BOT’s banking supervisory duties. The BOT’s objectives are clearly specified in both laws and are published in the Government Gazette. All BOT notifications under FIBA shall come into force upon publication in the Government Gazette (Section 7 of FIBA). In addition, the BOT has published information related to its roles and responsibilities on the BOT website, for instances, the objectives prescribed under the BOT Act (Please see CP 1 for details), the BOT three-year strategic plan formulating the onward operations, the annual report and weekly reports demonstrating the BOT’s overall operation. As a banking supervisor, the BOT publishes information about Financial Supervision in Practice which contains details relating to subjects as banks’ policies on supervision, examination, and analysis, overview of supervisory procedures, financial businesses under the BOT’s supervision, onsite examination, offsite examination, supervision of banks, asset management companies and nonbanks, troubled or non-compliant banks and supporting functions Furthermore, the BOT publishes an annual supervision report providing the supervisory information such as the overall operation of banks, supervision, and development of banks system including to guidelines for future supervision and continuous development. |
| EC4 | The supervisor has effective internal governance and communication processes that enable supervisory decisions to be taken at a level appropriate to the significance of the issue and timely decisions to be taken in the case of an emergency. The governing body is structured to avoid any real or perceived conflicts of interest. |
| Description and findings re EC4 | Supervisory decisions are taken at many levels and the BOT has an institution-wide formal approval and escalation policy. Any supervisory recommendations or orders that do not significantly affect the bank’s overall risk would be given by directors and senior directors, and any decision that would have an impact to the bank’s overall risk would be made by assistant governor. In addition, any issues that have an impact to Composite Rating of the bank will be decided by the Financial Institutions Examination Development Subcommittee. The internal governance for supervisory decision at high level is mainly operated under two sub-committees, namely, the Financial Institutions Examination Development Subcommittee (FIED) and the Financial Institutions Policy Sub-committee (FIP). The FIED is tasked with issues related to financial institutions examination, whereas FIP is tasked with issues concerning regulatory and supervisory framework, including licensing, financial institutions development and resolution framework. Both FIED and FIP Sub-committees are chaired by the deputy governor for Financial Institution Stability and consist of assistant governors, senior directors under the Financial Institutions Policy Group, Supervision Group. As part of the BOT’s crisis management framework, the BOT has established the Crisis Management Committee (CMC) to facilitate a centralized supervisory decision and take timely action during a crisis. The CMC is chaired by the Governor and consists of Deputy Governors, and Assistant Governors. For the process to provide liquidity assistance under Section 42 of the BOT act, the CMC will be called to make decision on the resolution and amount of liquidity facilities to be provided. This will be further escalated to the FIPC and the Minister for final approval. |
| EC5 | The supervisor and its staff have credibility based on their professionalism and integrity. There are rules on how to avoid conflicts of interest and on the appropriate use of information obtained through work, with sanctions in place if these are not followed. |
| Description and findings re EC5 | Section 25(4) of the BOT Act authorizes the BOT Board to issue the regulations on the prevention of personal benefit involvement and the code of conduct of the board members, the governor, officers and employees. There are sanctions in place if these regulations and the code of conduct are not followed. Appropriate disciplinary actions, ranging from written reprimand to probation, salary reduction, and termination of employment by discharge or dismissal and legal prosecution, will be taken depending on the severity of the infringement. The BOT has taken disciplinary action in the past. Senior decision makers in supervisory matters must avoid taking positions in financial institutions for a year once they resign from the BOT for less than one year. The BOT staff and their families must avoid giving as well as receiving gifts, money, or other benefits from others who have related business with the BOT and the amount should not exceed THB 3,000 since those might cause dependence and impartiality of the examiner. The BOT has set up data security practices of Financial institutions’ information and electronic systems access to information for a supervisor in each level of position and in different department to protect confidential information being access only by the authorized person. Section 46 of the BOT Act prohibits the board members, the governor, officers and employees to conduct any act which may cause the conflict between their personal and the BOT’s interest. Any person who fails to keep any information acquired during performing their duties as confidential shall be liable to imprisonment or a fine as specified by law (Section 74 of the BOT Act and Section 154 of FIBA Act). |
| EC6 | The supervisor has adequate resources for the conduct of effective supervision and oversight. It is financed in a manner that does not undermine its autonomy or operational independence. This includes:
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| Description and findings re EC6 | As mentioned in EC1, the BOT is self-financed with revenue from interest income, gains from foreign exchange, among others, and therefore does not rely on the government’s funding or approval for its operation. Its budget plan is approved by the BOT Board (Section 25(1)). This financial independence has allowed the BOT to make all necessary investment in human resources, IT systems and other needed infrastructures. The BOT has a total of 500 officers responsible for the areas of regulatory policies and supervision of licensed financial institutions in Thailand. The BOT’s salary scales are competitive with the private sector, averaging at the top quartile of the banking industry. The BOT’s salary structure is reviewed regularly to ensure its competitiveness to attract and retain staff. In term of professionalism, the BOT has continuously conducted training for supervisors to enhance their knowledge and understanding about the business of the financial institutions, including updating them on new international regulatory standards. The trainers consisting of internal speakers and professional guest speakers who are invited from various agencies, both local and international supervisory agencies. The assessors obtained a list of attended trainings for 2018 and 2017. Moreover, within the BOT, supervisors rotate to other departments, performing related tasks such as Financial Institution Applications Department, Regulatory Policy Department or Payment Systems Policy Department to improve their skills and experience. The BOT supervisors also go on external secondment in banks and payment companies in Thailand and work with other international regulators such as JFSA, MAS, BNM, etc. They sign confidentiality letters when doing so. The budget and program for regular training of staff is sufficiently provided. The average training days for each staff are approximately two weeks per year. Both internal and external training programs are provided with the aim to enhance the quality of the BOT supervisors for risk-based supervision. For example, the BOT has established the School of Supervisors in 1999 to train Supervisors and financial institutions’ policy personnel. It also regularly sends officers to participate in training programs held by the South East Asian Central Banks Research and Training Center (SEACEN), the EMEAP Working Group on Banking Supervision, APEC, World Bank, U.S. Federal Reserve, IMF, and BIS, among others, to strengthen supervisors’ skills in line with changes in the global environment. In addition to human resources development, heavy investment has been made in IT and the centralized data management system (DMS) that supports economic and financial analysis and bank supervision work. A travel budget is well-equipped for the onsite work, effective cross-border cooperation and participation for both domestic and international meetings (e.g., supervisory colleges). |
| EC7 | As part of their annual resource planning exercise, supervisors regularly take stock of existing skills and projected requirements over the short- and medium-term, taking into account relevant emerging supervisory practices. Supervisors review and implement measures to bridge any gaps in numbers and/or skill-sets identified. |
| Description and findings re EC7 | The BOT regularly reviews the adequacy of skilled staff to ensure that current supervisory practices are properly addressed over the short- and medium-term. The BOT’s supervisors are trained continuously by attending specific courses developed each year (School of Supervisors) including seminar and lectures given by experts. Internship and secondment are provided to enhance supervisory skills in specialized business or areas. As banking regulation and supervision becomes more challenging under the fast-changing business environment, the BOT is well-prepared to tackle this issue by recruiting and training staff with more specialized skills e.g., financial engineering, IT specialists to bridge gaps in numbers and skill-sets. Training needs survey is regularly conducted to identify areas of knowledge that the supervisors need. The result of survey is considered when developing training courses and the result is also used for preparing training roadmap for bank supervisors individually in order to develop their soft skills, such as communication, interview, presentation, writing and analysis skill, and technical skills. For example, in 2016, training needs focused on macro prudential supervision, payment system roadmap, underwriting and credit process, financial innovation and new products, corporate governance, IFRS 9 accounting standard, and trade finance. |
| EC8 | In determining supervisory programmes and allocating resources, supervisors take into account the risk profile and systemic importance of individual banks and banking groups, and the different mitigation approaches available. |
| Description and findings re EC8 | All Thai banks are subject to onsite examination at least once a year, while subsidiaries of foreign bank, foreign bank branches, asset management companies (AMCs) and nonbanks with level 1 or 2 rating are subject to onsite examination at least once every three years; those with level 4 or 5 rating are subject to onsite examination at least once a year. The BOT will closely monitor financial institutions with level 4 rating and supervisory intervention will be implemented for financial institutions with level 5 rating. (Please refer to CP8 for further details). |
| EC9 | Laws provide protection to the supervisor and its staff against lawsuits for actions taken and/or omissions made while discharging their duties in good faith. The supervisor and its staff are adequately protected against the costs of defending their actions and/or omissions made while discharging their duties in good faith. |
| Description and findings re EC9 | Section 5 of the Act on Tortious Liability of Officials B.E. 2539 (1996) provides protection to individual government official including the BOT personnel, whereby civil action can only be taken against the organization, not individual officer. Under the law, the government organization must be accountable to an affected third party following the performance of duties by its officer. This principle is affirmed by the Supreme Administrative Court order no. 880/2548, dated 28th December B.E. 2548 (2005). In this case, the Supreme Administrative Court had an opinion that the Plaintiff cannot file a case against the Governor as the Defendant No. 2 but shall directly sue the BOT as the Defendant No. 1 which is a government agency liable to an aggrieved person for the result of a wrongful act by its officer in the performance of his duties. However, if there is a case that the officer is sued, which may occur due to his or her tortious act, the BOT will provide legal assistance to them under the BOT internal regulation: Assistance for Legal Proceedings and for Protection of Life, Body, and Property of Employees B.E. 2546 (2003); so that, the case may finally be dismissed on the ground of the above reason. The legal assistance under the BOT internal regulation covers all kind of cases, not only civil case, criminal case or administrative case, and assists the officers, not only current but also former, who carry out their duties in good faith, being accused, sued, cited as a witness, threaten or injured to life, body or property. The assistance includes expenses in the defense against legal proceedings and, if necessary, service of a legal officer. |
| Assessment of Principle 2 | Largely Compliant |
| Comments | The process for the appointment and removal of the governor and the members of the FIPC is transparent, and the BOT has adequate resources for the conduct of effective supervision and appropriate training plans. Discussions with supervisors and banks confirmed that BOT staff has credibility based on their professionalism and integrity. The BOT regularly benchmarks its salary scales to the market and has sufficient funding to cover overseas inspections and training. The legal framework for banking supervision includes adequate legal protection for the supervisors. While the assessors have not observed any objective evidence of lack of independence of the BOT, there are some factors that have the potential to interfere with the BOT’s operational independence:
In terms of governance, the SFIs are supervised by a separate department, the Specialized Financial Institutions Supervision and Examination Department, but this department reports to the Assistant Governor of the Supervision Group, just like the commercial bank supervision departments. The assessors were also informed that the supervisory governance and decision-making for commercial banks and SFIs is the same. In other words, the members of the Financial Institution Examination Development Sub Committee and the Financial Institutions Policy subcommittee must decide both on commercial banks and SFIs regulatory and supervisory actions, considering their divergent degrees of independence. It is not unlikely that contamination seeps through and that matters arising in the SFI area spill over to the commercial bank decision making process, particularly because some commercial banks also have state ownership. The assessors make the following recommendations:
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| Principle 3 | Cooperation and collaboration. Laws, regulations or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information.10 |
| Essential criteria | |
| EC1 | Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with all domestic authorities with responsibility for the safety and soundness of banks, other financial institutions and/or the stability of the financial system. There is evidence that these arrangements work in practice, where necessary. |
| Description and findings re EC1 | The BOT supervises financial institutions that can be part of financial conglomerates, which may include entities such as securities companies and insurance companies, supervised by the SEC and the OIC respectively. Various arrangements have been established to facilitate coordination between the BOT, the Minister, the SEC, the OIC, and other relevant supervisory authorities such as the AMLO. Cooperation occurs at two levels: (a) High-level: High-level cooperation emphasizes policy-making decisions. The high-level cooperation among domestic supervisory authorities has been achieved through cross-directorships, the FIPC, and the 3-Regulators Steering Committee as follows:
(b) Working-level: Working-level coordination emphasizes execution and information exchange.
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| EC2 | Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with relevant foreign supervisors of banks and banking groups. There is evidence that these arrangements work in practice, where necessary. |
| Description and findings re EC2 | In order to enhance efficiency of supervision, risk mitigation and exchange of important information for cross-border banking supervision, close cooperation between the BOT and other foreign supervisors is established as follows. The BOT has established formal arrangements of information sharing and mutual cooperation with foreign supervisors through several MOU on information exchange for effective cross-border banking supervision. As the majority of overseas branches of Thai banks are located in Asia, the BOT signed the MOUs with several supervisors in the region such as Hong Kong (HKMA), Japan (FSA), Vietnam (SBV), Cambodia (NBC), India (RBI), Malaysia (BNM), Singapore (MAS), China (CBRC), Philippines (BSP), and Indonesia (OJK). This sets the scope of supervisory cooperation between home and host country supervisors in the areas of information sharing and communication during the licensing process and the ongoing supervision. When granting approval for Thai banks’ overseas branches/subsidiaries, the BOT sets conditions, which include submission of the following reports to the BOT:
Occasionally, the BOT has collaboration and joint IT Examination with other regulators; for examples; MAS (Please refer to CP 13) .Should there be changes in financial institutions that need close attention, the BOT will contact home and host regulators by phone, email or letter to discuss the issues of concern. The BOT have bilateral meetings with a number of regulators in the region including Malaysia, Singapore, Indonesia, Philippines, Lao, Vietnam, China, and Hong Kong. The bilateral meeting is held every two years to enhance cooperation between authorities, exchange views on regional and global economic situation, update and sharing knowledge on financial system developments (e.g., fintech, cyber security strategy), as well as facilitate capacity building programs for their staffs. Moreover, there are regular regional and international regulatory and supervisory meetings across various levels of seniority which the BOT supervisors have been participating, for examples, ASEAN Economics Community (AEC), Executives’ Meeting of East Asia and Pacific Central Bank (EMEAP), Supervision and Implementation Group (SIG), and the Financial Stability Board (FSB) Regional Consultative Group (RCG). These meetings provide various formal and informal arrangements that facilitate collaborative work and information exchanges between the BOT and foreign supervisors and help strengthen supervisory coordination. |
| EC3 | The supervisor may provide confidential information to another domestic authority or foreign supervisor but must take reasonable steps to determine that any confidential information so released will be used only for bank-specific or system-wide supervisory purposes and will be treated as confidential by the receiving party. |
| Description and findings re EC3 | Section 154 (4) of FIBA, empowers the BOT to disclose confidential information to facilitate the supervision of domestic and foreign supervisors. Hence, the BOT can share information on financial institutions and examination results with other domestic supervisory authorities including the MOF, SEC, OIC, DPA and AMLO in the case where such confidential information shall be used for supervisory purposes as prescribed in the MOUs. For information sharing with foreign supervisors, the MOUs between BOT and foreign supervisory authorities include the protection clause of confidential information. For example, the information shall be used only for banking supervision and must be kept confidential. The MOUs also include the clauses on safeguarding of confidential information shared as follows:
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| EC4 | The supervisor receiving confidential information from other supervisors uses the confidential information for bank-specific or system-wide supervisory purposes only. The supervisor does not disclose confidential information received to third parties without the permission of the supervisor providing the information and is able to deny any demand (other than a court order or mandate from a legislative body) for confidential information in its possession. In the event that the supervisor is legally compelled to disclose confidential information it has received from another supervisor, the supervisor promptly notifies the originating supervisor, indicating what information it is compelled to release and the circumstances surrounding the release. Where consent to passing on confidential information is not given, the supervisor uses all reasonable means to resist such a demand or protect the confidentiality of the information. |
| Description and findings re EC4 | Section 74 of the BOT Act and Section 154 of FIBA state that the BOT management and staff performing their duties authorized under this Act, have the duty to deny any requests for confidential supervisory information, except for the purpose of legal investigation, court proceeding, supervisory purpose, or otherwise required by law. The bilateral MOUs between the BOT and SEC, OIC, and DPA stipulate that no information may be passed on to the third party without prior consent of the originating authority, while the MOUs between the BOT and foreign supervisors includes a similar clause as described in EC3. |
| EC5 | Processes are in place for the supervisor to support resolution authorities (e.g., central banks and finance ministries as appropriate) to undertake recovery and resolution planning and actions. |
| Description and findings re EC5 | In Thailand, the BOT is the supervisor and resolution authority for banks, whereas the DPA is responsible for paying out insured deposits and liquidating banks. Information sharing and coordination arrangements between the BOT and DPA are clearly stated in the DPA Act and FIBA, for example, the BOT’s sharing of bank examination reports with the DPA upon request (Section 39 of DPA Act). The MOU between domestic supervisors (BOT, SEC, and OIC) covers exchange of information and coordination in times of crises. At present, the 3-Regulators Steering Committee as mentioned in EC1 and the FIPC serve as a forum for communication and cooperation between the authorities on cross-sectoral issues. The Steering Committee would be a forum to seek support from relevant domestic supervisors in taking resolution actions, if needed. The MOUs with foreign supervisors as mentioned in EC2 also include elements of coordination and preparation during time of crisis, which would facilitate a group recovery and resolution planning. Moreover, as a host supervisor of a G-SIFI and given the potential systemic relevance of its operations in Thailand, the BOT has concluded a Cross-border Cooperation Agreement (COAG) with the relevant home supervisor and has attended a Supervisory College and Crisis Management Group (CMG) meetings with relevant home and host supervisory and resolution authorities. Through Supervisory college and CMG, the BOT is kept informed of parts of the group recovery plan and resolution plan, which would enable consistent resolution actions. Please refer to CP13 EC6 for further details on cross-border coordination and collaboration to undertake resolution. |
| Assessment of Principle 3 | Compliant |
| Comments | The assessors discussed domestic and cross border cooperation with the relevant supervisors. They reviewed the MOUs as well as agendas of supervisory colleges held. They obtained evidence that cooperation between and information sharing with domestic and international authorities is effective. |
| Principle 4 | Permissible activities. The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined and the use of the word “bank” in names is controlled. |
| Essential criteria | |
| EC1 | The term “bank” is clearly defined in laws or regulations. |
| Description and findings re EC1 | Section 4 of FIBA defines the term “financial institution business” to include commercial, finance, and credit foncier (mortgage financing) business and the business undertaken by specialized financial institutions (SFI). A commercial bank is defined as a public limited company licensed to undertake commercial banking business, and includes retail banking, and branches and subsidiaries of foreign banks. |
| EC2 | The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined either by supervisors, or in laws or regulations. |
| Description and findings re EC2 | The permissible activities of a bank are defined in Section 4 of FIBA. Section 4 defines “commercial banking business” as the undertaking of the business of acceptance of money or deposits subject to withdrawal on demand or at the end of a specified period and of utilizing such money to, for instance grant credits, buy or sell of bills of exchange or any other negotiable instruments, buy and sell of foreign exchange. Commercial bank business is specifically differentiated from “financial business” by the ability to provide checking accounts. Section 36 of FIBA empowers the BOT to allow banks to engage in activities, which are connected or incidental to commercial banking business or any business traditionally regarded as commercial banking practice or any other business of similar nature. |
| EC3 | The use of the word “bank” and any derivations such as “banking” in a name, including domain names, is limited to licensed and supervised institutions in all circumstances where the general public might otherwise be misled. |
| Description and findings re EC3 | Section 9 of FIBA specifies that the commercial banking business may be undertaken only by a juristic person in the form of a public limited company, licensed by MOF with the recommendation of the BOT. Section 11 of FIBA requires a commercial bank to use a name beginning with the word “bank,” as specified in the license. Section 12 of FIBA specifies that no person other than a bank shall use a name or a word denoting name in a commercial banking business as “bank” or any other word that has the same meaning. |
| EC4 | The taking of deposits from the public is reserved for institutions that are licensed and subject to supervision as banks.11 |
| Description and findings re EC4 | Institutions taking deposits from the public in Thailand include commercial banks, finance companies, credit foncier companies, and must obtain a license from MOF with the recommendation of the BOT and are subject to supervision by the BOT. For the SFIs, which are also supervised by the BOT, each of them are established under their individual act. Those acts give them the right of doing business according to their mandates. The regulatory and the supervisory approach for finance companies and credit foncier companies, is like commercial banks, commensurate to their respective risk profile. The oversight and legal framework of SFIs is being strengthened to parallel commercial banks but the process has not been completed. Revision of FIBA Section 120, which has already been published in the Royal Thai Government Gazette, will further enhance SFI supervision. |
| EC5 | The supervisor or licensing authority publishes or otherwise makes available a current list of licensed banks, including branches of foreign banks, operating within its jurisdiction in a way that is easily accessible to the public. |
| Description and findings re EC5 | A current list of licensed banks, including branches of foreign banks, is published on the BOT website |
| Assessment of Principle 4 | Largely Compliant |
| Comments | Permissible activities are limited to financial sectors. Through subsidiaries, banks may offer securities and insurance products. The role of BOT as supervisor of the SFIs continues to be developed with further work planned for the regulatory framework. |
| Principle 5 | Licensing criteria. The licensing authority has the power to set criteria and reject applications for establishments that do not meet the criteria. At a minimum, the licensing process consists of an assessment of the ownership structure and governance (including the fitness and propriety of Board members and senior management)12 of the bank and its wider group, and its strategic and operating plan, internal controls, risk management and projected financial condition (including capital base). Where the proposed owner or parent organization is a foreign bank, the prior consent of its home supervisor is obtained. |
| Essential criteria | |
| EC1 | The law identifies the authority responsible for granting and withdrawing a banking license. The licensing authority could be the b2anking supervisor or another competent authority. If the licensing authority and the supervisor are not the same, the supervisor has the right to have its views on each application considered, and its concerns addressed. In addition, the licensing authority provides the supervisor with any information that may be material to the supervision of the licensed bank. The supervisor imposes prudential conditions or limitations on the newly licensed bank, where appropriate. |
| Description and findings re EC1 | The BOT is the sole authority responsible for banking supervision while the licensing authority is the MOF. Under Section 9 of FIBA, commercial banking business is undertaken only by a public limited company, licensed by the MOF with the recommendation of the BOT, who processes the application. Similarly, under FIBA Section 10, the MOF is empowered to grant a license for a foreign commercial bank that wishes to establish a branch in Thailand, with the recommendation of the BOT. In granting the license, the MOF may impose additional prudential conditions as deemed necessary. The licensing criteria are in line with ongoing prudential regulations, including, financial soundness, ownership structure, corporate governance, fit and proper of management and significant shareholders, management quality, strategic plan, business plan, risk management systems, and in the case of foreign bank subsidiaries, supervision standards of the home supervisor. The BOT is responsible for accepting the application, assessing applicants against the set criteria, and providing recommendations concerning qualifications of the applicants to the MOF. Throughout the application process, the BOT and the MOF share information to address any issues concerning the application. A banking license may be revoked by virtue of FIBA Sections 83, 90 (5), 93, 95, 97, 110, and 111 in cases such as when the bank fails to comply with BOT’s corrective order, fails to maintain capital funds above the level required by the BOT, or when the bank’s operations may cause damage to the public, in which case the BOT has the power to order, a suspension of business operations, removal of directors, or closure of the bank. After the BOT orders the bank closure, the BOT shall propose to the MOF that the bank’s license be revoked. Any bank intending to dissolve or suspend its operation shall obtain prior approval from the BOT (Section 78). |
| EC2 | Laws or regulations give the licensing authority the power to set criteria for licensing banks. If the criteria are not fulfilled or if the information provided is inadequate, the licensing authority has the power to reject an application. If the licensing authority or supervisor determines that the license was based on false information, the license can be revoked. |
| Description and findings re EC2 | Section 9 of FIBA empowers MOF to establish licensing criteria, with the advice of BOT. In reviewing the application to make recommendations to the MOF, the BOT ensures that the applicant meets all the licensing criteria, with supporting official documents signed by an authorized official. Both the BOT and the MOF have the right to request any information in addition to the documents required by the Licensing Notification. For example, the bank may be asked to declare any wrongdoings by the directors and/or managers with significant damage to the public over the past three years. The BOT may recommend to MOF to reject an application if it determines that the applicant does not meet the established criteria. If information supplied in the application is later deemed to be false, the MOF has the power to revoke the license by virtue of Chapter 6 of Administrative Procedure Act, B.E. 2539 (1996) |
| EC3 | The criteria for issuing licenses are consistent with those applied in ongoing supervision. |
| Description and findings re EC3 | Example: During the licensing of a foreign bank’s subsidiary, the BOT takes into consideration: (i) feasibility of the bank’s business plan and strategy, (ii) risk management, (iii) capital ratio/ fund, and (iv) fit and propriety of directors and high-level management. These factors are of a continuous nature, and thus consistent with requirements imposed on an ongoing basis, which are evaluated along with other matters throughout the course of the BOT’s ongoing supervision, such as annual onsite examinations and quarterly report reviews, in which the BOT assesses the bank’s compliance with prudential standards, its strategic direction, and risk management capacity commensurate with the risks arising from the bank’s Significant Activities. Should any concern arise, the BOT may visit the bank or require the bank to provide further information to assess whether the prudential and licensing requirements continue to be met. |
| EC4 | The licensing authority determines that the proposed legal, managerial, operational and ownership structures of the bank and its wider group will not hinder effective supervision on both a solo and a consolidated basis.13 The licensing authority also determines, where appropriate, that these structures will not hinder effective implementation of corrective measures in the future. |
| Description and findings re EC4 | There have not been applications filed since 2014. However, procedures are in place to ensure that consolidated supervision is not hindered by complex structures. Application of requirements were observed in applications for change in ownwership of organizational restructuring, where BOT either rejected the proposal or required changes to the structure. The BOT ensures that the proposed legal, managerial, operational, and ownership structures of the bank will not hinder effective solo or consolidated supervision as well as the implementation of corrective measures in the future by reviewing appropriateness of ownership and corporate and the expertise of the board of directors; committees; sub-committees; and senior management, and the organizational structure, as well as ensuring that these structures comply with the BOT’s corporate governance and fit-and-proper standards. File for last application filed reviewed. The BOT also seeks to ensure that the home supervisor conducts consolidated supervision in compliance with the Basel Core Principles. A consent letter from the home country supervisor allowing the bank to establish in Thailand must be obtained as part of the application. Further information may be obtained from the home supervisor through other channels of cooperation, such as teleconferences, meetings and MOUs on supervisory information exchange. |
| EC5 | The licensing authority identifies and determines the suitability of the bank’s major shareholders, including the ultimate beneficial owners, and others that may exert significant influence. It also assesses the transparency of the ownership structure, the sources of initial capital and the ability of shareholders to provide additional financial support, where needed. |
| Description and findings re EC5 | To determine the suitability of the bank’s major shareholders, including ultimate beneficial owners, and transparency of ownership structure, the BOT reviews information on the organization of the bank and its group from the bank’s credit rating reports and annual reports from the past five years, which contain the bank and its group’s equity holding structure. For foreign bank subsidiaries, the applicant is required to identify the 10 largest shareholders of the parent bank. The BOT then conducts a suitability assessment that involves a thorough assessment of the parent bank, including the financial standing and soundness, source of funds, and expertise relevant to the proposed business plan. Its executives, shareholders, and the proposed executives for the bank to be established must also meet the BOT’s fit and proper criteria. The BOT also identifies the entity that has controlling power or influence over the bank, to ensure that the BOT can exercise its supervisory measures when necessary. The capital raising plan, source of funds and credit plan are included in the business plan required to be submitted with the application. The BOT also requires a letter from the applicant or the parent company to confirm commitment to provide liquidity support and capital increase when the capital fund falls, or may fall, below the level required by law. |
| EC6 | A minimum initial capital amount is stipulated for all banks. |
| Description and findings re EC6 | The minimum initial capital is determined on a case-by-case basis; considering: scope of proposed business (full commercial bank or retail bank), the number of branches and ATMs allowed and the economic environment, financial sector development and financial system resiliency. In 2004, a finance company or credit foncier intending to convert its business to retail or commercial bank was required to have initial tier-1 capital in an amount of no less than THB 250 million and THB 5,000 million, respectively (as of August 31, 2018, equivalent to USD 7.6 million and USD 152.9 million). In 2011, a retail bank intending to upgrade to a full commercial bank was required to have initial tier-1 capital in an amount no less than THB 10 billion (equivalent to USD 305.8 million) the same amount is required in paid-up capital for an upgrade from a foreign bank branch to a foreign bank subsidiary. In 2013, a new subsidiary of a foreign bank was required minimum paid-up capital of THB 20 billion (equivalent to USD 611.7 million). |
| EC7 | The licensing authority, at authorization, evaluates the bank’s proposed Board members and senior management as to expertise and integrity (fit and proper test), and any potential for conflicts of interest. The fit and proper criteria include: (i) skills and experience in relevant financial operations commensurate with the intended activities of the bank; and (ii) no record of criminal activities or adverse regulatory judgments that make a person unfit to uphold important positions in a bank.14 The licensing authority determines whether the bank’s Board has collective sound knowledge of the material activities the bank intends to pursue, and the associated risks. |
| Description and findings re EC7 | In assessing the application, the BOT reviews the organizational structure and requires that the applicant submit the profile of persons proposed for (i) Chairman of the board; (ii) Chairman of the executive board and/or Chief Executive Officer; and (iii) managers, or other equivalent positions. Details in the profile must include, but are not limited to, academic qualifications, work experience, history of lawsuits or convictions (both civil and criminal) and a list of related businesses to self- or related persons, to identify potential conflicts of interest. Once approved by the MOF, the bank must commence its operation within one year, during which the bank must submit the list of persons to be appointed as directors, managers and persons with power of management, to be approved by the BOT. The appointees must not possess the prohibited characteristics as specified in Section 24 of FIBA and must meet the fit and proper criteria as prescribed in BOT Notification No. FPG. 11/2561 but not limited to the following factors: (i) honesty, integrity and reputation (including record of unlawful doings and adverse regulatory judgment); (ii) competence, capability and experiences; and (iii) financial soundness. The background of each director is reviewed to determine whether the board has sound collective knowledge of activities the bank intends to pursue and the understanding of the associated risk. Compliance with other Thai and international regulators, criminal records and the Anti-Money Laundering Office is also taken into consideration. |
| EC8 | The licensing authority reviews the proposed strategic and operating plans of the bank. This includes determining that an appropriate system of corporate governance, risk management and internal controls, including those related to the detection and prevention of criminal activities, as well as the oversight of proposed outsourced functions, will be in place. The operational structure is required to reflect the scope and degree of sophistication of the proposed activities of the bank.15 |
| Description and findings re EC8 | The license application requires the applicant to submit a detailed business plan to support its banking strategy. The plan must demonstrate ability to establish risk management systems commensurate with business operations, particularly for the risks arising from its Significant Activities (SAs) and to have an appropriate information technology system and management. The extent to which the risk management systems will be based in Thailand must be specified. Further, the applicant is required to submit operation details including internal controls and its AML/CFT program. In cases where there is a need for outsourced functions, the BOT will review the proposed outsourcing policy, including the applicant’s oversight of these outsourced functions. After the MOF has granted approval for the bank to be established, the bank has one year to commence its operations, during which time the bank must submit quarterly progress reports to the BOT to ensure readiness and adequacy of all systems. Prior to commencing operations, the BOT conducts a thorough onsite examination that includes an assessment of the organizational structure, operational systems, policy making procedures, reporting lines, risk management systems, internal control mechanisms, and workflow process. The BOT would only grant approval to commence operations if it determines that all systems are adequate. |
| EC9 | The licensing authority reviews pro forma financial statements and projections of the proposed bank. This includes an assessment of the adequacy of the financial strength to support the proposed strategic plan as well as financial information on the principal shareholders of the bank. |
| Description and findings re EC9 | As part of the application process, the applicant is required to submit a business plan for the proposed bank, comprising of detailed: (i) the business strategy; (ii) pro-forma financial statements for no less than three years, with documentation on assumptions made; and (iii) plan for the establishment of the head office, branch or financial business group. The BOT reviews the business plan and determines the adequacy of the financial strength to support the plan and proposed operations. In an establishment of a foreign bank subsidiary, the BOT requires a confirmation letter from the parent bank that it will, among other things, provide liquidity and capital to support its subsidiary immediately when the capital fund of the subsidiary falls or may fall below the level required by law. Furthermore, the BOT takes into consideration the experience, expertise, performance, financial standing, risk management and governance of the parent company to ensure that it could provide said support to the proposed subsidiary, should it be needed. |
| EC10 | In the case of foreign banks establishing a branch or subsidiary, before issuing a license, the host supervisor establishes that no objection (or a statement of no objection) from the home supervisor has been received. For cross-border banking operations in its country, the host supervisor determines whether the home supervisor practices global consolidated supervision. |
| Description and findings re EC10 | A foreign bank applicant is required to submit to the BOT, together with its application, a consent letter from its home supervisor allowing the establishment of a branch or subsidiary in Thailand and confirming that there is no concern, such as on the bank’s financial soundness and integrity. The foreign bank applicant must also provide information on the home country’s consolidated supervision regulatory regime as part of the supporting documents for its application. In reviewing the application, the BOT takes into consideration soundness and credibility of the home supervisor in applying international standards of banking supervision, as well as the nature of its supervisory relationship with the BOT, including cooperation channels such as MOUs and involvement in international fora such as EMEAP and SEACEN that may assist the BOT in obtaining information on the foreign bank when needed. |
| EC11 | The licensing authority or supervisor has policies and processes to monitor the progress of new entrants in meeting their business and strategic goals, and to determine that supervisory requirements outlined in the license approval are being met. |
| Description and findings re EC11 | The BOT monitors new entrants regarding their compliance with all the licensing requirements, including their business and strategic goals. The new bank must comply with supervisory requirements applicable to all banks and is subject to the BOT’s ongoing supervision, including reporting requirements, meetings and examinations, along with assessments on the bank’s ability to meet its business goals and licensing requirements. Significant deviations from the intended strategic targets will be addressed as part of the bank’s strategic risk assessment. |
| Assessment of Principle 5 | Compliant |
| Comments | Applications for new banks are only accepted in pre-determined periods. The last period for filing applications closed in 2014; four licenses were granted. One application was denied in 2016 because it was filed after closing of the 2010–2014 licensing period established in the Financial Sector Master plan. Application reviewed included a request by the applicant for a waiver on paid-in capital at inception, the BOT denied, and the MOF concurred. |
| Principle 6 | Transfer of significant ownership. The supervisor16 has the power to review, reject and impose prudential conditions on any proposals to transfer significant ownership or controlling interests held directly or indirectly in existing banks to other parties. |
| Essential criteria | |
| EC1 | Laws or regulations contain clear definitions of “significant ownership” and “controlling interest.” |
| Description and findings re EC1 | Section 4 of FIBA defines a “major shareholder” as a person holding or possessing shares of a financial institution in an amount exceeding 5 percent of outstanding shares, including shares held by “related persons” who may exert management influence on the bank’s parent company, subsidiaries or affiliates. The term “major shareholder” extends to include beneficial owners of said shares, as it covers the holding of shares by related persons who may exert management control through a chain of ownership or by exercising their voting rights as nominees. Section 4 of FIBA also defines control as:
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| EC2 | There are requirements to obtain supervisory approval or provide immediate notification of proposed changes that would result in a change in ownership, including beneficial ownership, or the exercise of voting rights over a particular threshold or change in controlling interest. |
| Description and findings re EC2 | Section 17 of FIBA states that any person who directly or indirectly holds or possesses shares of a financial institution in an amount of 5 percent or more of outstanding shares shall report the holding or possession of the shares to the BOT in accordance with the rules prescribed in BOT Notification No. FPG. 57/2551. The number of shares shall include the shares held by related persons. Under Section 18 of FIBA, any person seeking to hold more than 10 percent of outstanding shares must obtain prior approval from the BOT. To obtain approval from the BOT, the acquirer must demonstrate the potential benefits of such acquisition, and must meet the criteria set by the BOT, including: fit and proper, financial soundness, relevancy of expertise and experience, and business networks that may be utilized. Section 16 of FIBA prohibits holding of shares by non-Thais exceeding of 25 percent, unless permitted by the BOT. The BOT may permit non-Thais to hold shares up to 49 percent of total shares sold, whereas the MOF, with recommendation from the BOT may permit shareholdings by non-Thais to exceed 49 percent only when such holding is necessary to rectify or strengthen the operations of the financial institution, or to preserve the stability of the financial system. The MOF may impose additional conditions as necessary. |
| EC3 | The supervisor has the power to reject any proposal for a change in significant ownership, including beneficial ownership, or controlling interest, or prevent the exercise of voting rights in respect of such investments to ensure that any change in significant ownership meets criteria comparable to those used for licensing banks. If the supervisor determines that the change in significant ownership was based on false information, the supervisor has the power to reject, modify or reverse the change in significant ownership. |
| Description and findings re EC3 | Under Section 18 of FIBA, any person seeking to hold more than 10 percent of outstanding shares is required to obtain prior approval from the BOT. This includes shares held indirectly through related persons (as defined in Section 4 of FIBA). Section 21 of FIBA prohibits financial institutions from paying dividends or any other form of benefits or grant voting rights to shares held in contravention of Section 18 requirements. In reviewing fitness of the proposed shareholder, the BOT determines whether the person meets the fit and proper criteria comparable to those used for licensing banks i.e., good reputation, relevant expertise, good financial standing and performance record, sound risk management system, good governance, with sound supervision standards of home supervisor. The applicant must also be able to demonstrate the potential benefits to the financial institution, as well as its ability to meet the BOT’s prudential requirements. Applicants are required to declare that they are free of any AML/CFT offense, criminal record, or past supervisory sanction that would make them unfit, which the BOT will verify against the records kept by AMLO, Royal Thai Police and other relevant regulators. The fit and proper checks extend to the entity’s executives and major shareholders. The BOT may reject the proposed acquisition if these requirements are not met, or if checks with domestic and global databases or comments from other regulators reveal that the person may be unfit to hold significant ownership in a bank. Should the BOT later find that the change in significant ownership was based on false or misleading information, the BOT is entitled to modify or reverse a previously granted approval based on Chapter 6 of the Administrative Procedure Act B.E. 2539. If the person fails to dispose the excess shares within the period prescribed by the BOT, Section 19 of FIBA empowers the BOT to file a motion to the court to order the disposal of the excess shares, where the court shall have the power to order a sale by auction or by any other method. |
| EC4 | The supervisor obtains from banks, through periodic reporting or onsite examinations, the names and holdings of all significant shareholders or those that exert controlling influence, including the identities of beneficial owners of shares being held by nominees, custodians and through vehicles that might be used to disguise ownership. |
| Description and findings re EC4 | All banks are required to register as public limited companies, whereby Section 8 of SEC’s Notification: Rules, Conditions and Procedures Governing the Disclosure of Information and Other Acts of a Listed Company requires that they disclose the 10 largest shareholders in their annual reports. Section 22 of FIBA requires the bank to examine its register of shareholders prior to each shareholder’s meeting, or prior to each distribution of dividends or any other form of benefits and report the findings to the BOT. The report must include the names, related persons (including beneficial owners), and equity holdings of any person in possession of more than 5 percent of the bank’s total shares. A financial institution that fails to comply with Section 22 shall pay a fine of up to THB 500,000 with additional fine of THB 5,000 per day during the violation period (Section 125 of FIBA). In addition, the BOT has issued a letter to the Thai Bankers’ Association and the Association of International Banks requesting all banks to report equity holdings held through nominees and custodians and any other vehicles that may be used to disguise ownership to the BOT. During onsite visits, supervisors review whether the holdings of shares through nominees are compliant with relevant laws. |
| EC5 | The supervisor has the power to take appropriate action to modify, reverse or otherwise address a change of control that has taken place without the necessary notification to or approval from the supervisor. |
| Description and findings re EC5 | The BOT monitors changes in significant ownership through periodic reports and onsite visits. If it is found that a person has failed to obtain prior approval to hold shares in an amount exceeding 10 percent, the BOT, in pursuant to Section 19 of FIBA, can apply to the court for an order for the sale of the excess shares held by auction or any other methods. |
| EC6 | Laws or regulations or the supervisor require banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest. |
| Description and findings re EC6 | Banks are required to notify the BOT of any information that may negatively affect their major shareholders’ fit and proper status. This may include, for example, events where the shareholder’s financial position is significantly impacted, or when supervisory actions have been taken by other Thai or international regulators. For a foreign bank’s subsidiary, after the MOF has approved its establishment, any change in the foreign bank’s shareholders of or its parent company must have obtained prior approval by the BOT, whereby additional conditions may be imposed by the BOT as deemed necessary. |
| Assessment of principle 6 | Compliant |
| Comments | Since 2017 there have been two significant ownership changes approved and two denied. One denial was due to failing the fit-and-proper review and the other due to the proposed ownership structure that would have hindered consolidated supervision. |
| Principle 7 | Major acquisitions. The supervisor has the power to approve or reject (or recommend to the responsible authority the approval or rejection of), and impose prudential conditions on, major acquisitions or investments by a bank, against prescribed criteria, including the establishment of cross-border operations, and to determine that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision. |
| Essential criteria | |
| EC1 | Laws or regulations clearly define:
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| Description and findings re EC1 | Acquisition and Investment Chapter 3 Division 2 of FIBA establishes acquisition/investment limits. Banks, including their related persons, are not permitted to acquire or hold shares in any company exceeding the following limits, as stipulated in Section 34 of FIBA: (i) Individual limit: (Section 34, 2 and 3)
Under the BOT’s consolidated supervision, a financial institution is allowed to hold shares in a company, in excess of the aforementioned limits, provided that the company is in the financial institution’s Financial Business Group, for which, the company is permitted to undertake only (i) financial businesses such as commercial banking, finance, credit foncier, hire, purchasing, leasing, or (ii) supporting businesses that complement the operation of the financial institution and its Financial Business Group. The financial institution and its holding company are also permitted to conduct Venture Capital (VC) business that invests in SMEs or Financial Technologies (FinTech). For other businesses, the BOT may grant approval on a case-by-case basis for 10 year and set aggregate limit at 3 percent of capital. Section 35 of FIBA prohibits financial institutions from holding shares or securities of other financial institutions undertaking business of the same type to that of the financial institution. Fixed assets Section 80 (2) of FIBA prohibits financial institutions from purchasing or holding real estate/fixed assets except for:
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| EC2 | Laws or regulations provide criteria by which to judge individual proposals |
| Description and findings re EC2 | The internal manual sets the criteria to judge individual investments. The criteria consider the following factors:
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| EC3 | Consistent with the licensing requirements, among the objective criteria that the supervisor uses is that any new acquisitions and investments do not expose the bank to undue risks or hinder effective supervision. The supervisor also determines, where appropriate, that these new acquisitions and investments will not hinder effective implementation of corrective measures in the future.17 The supervisor can prohibit banks from making major acquisitions/investments (including the establishment of cross-border banking operations) in countries with laws or regulations prohibiting information flows deemed necessary for adequate consolidated supervision. The supervisor takes into consideration the effectiveness of supervision in the host country and its own ability to exercise supervision on a consolidated basis. |
| Description and findings re EC3 | The BOT requires the bank to conduct thorough due diligence prior to making any acquisitions or investments. Such due diligence would include, but is not limited to, an analysis of financial and managerial resources, risk management, business and strategic plan and a gap analysis comparing the BOT’s regulations to those of the host country, especially regulatory gaps in consolidated supervision regimes. In the case where the target company is established cross-border, the BOT requires the bank to demonstrate that the host country’s laws and regulations would not hinder effective supervision and that there is no secrecy law or restriction on access to information that would prohibit the bank from obtaining information required to enforce compliance with the BOT’s reporting requirements under consolidated supervision. The parent’s inability to adequately provide consolidated reports as required by the BOT is a valid ground for the BOT to prohibit such investment. In reviewing the proposal, the BOT ensures that the target acquisition complies with the guidelines set in the BOT Notification No. FPG. 8/2561: Regulations on Structure and Scope of Business of Financial Business Groups, and that the criteria as specified in EC2 are adequately met, risks are properly addressed and that the host supervisor’s regime would not inhibit the BOT’s implementation of corrective measures or exercise of consolidated supervision and supervisory cooperation with the host supervisor via MOU or supervisory colleges. In jurisdictions where supervision requirements are less strict, the investee is required to apply measures consistent with the BOT’s regulations. As a condition for approval, the target is required to submit a letter consenting to be consolidated in the Financial Business Group, and to comply with the BOT’s consolidated supervision regulations, as well as consent for the BOT to conduct examinations on the investee. The BOT may reject the proposal if it is determined that the bank is not able to meet all reporting requirements, or that the host country’s regulations may undermine the BOT’s ability to exercise consolidated supervision. |
| EC4 | The supervisor determines that the bank has, from the outset, adequate financial, managerial and organizational resources to handle the acquisition/investment. |
| Description and findings re EC4 | The bank’s due diligence report is required to demonstrate that it has adequate financial, managerial and organizational resources for the acquisition/investment according to the BOT’s internal manual. The BOT will not grant approval if it considers that bank does not have adequate financial and organizational resources to handle the new business or that it will hinder effective supervision by the BOT. |
| EC5 | The supervisor is aware of the risks that nonbanking activities can pose to a banking group and has the means to take action to mitigate those risks. The supervisor considers the ability of the bank to manage these risks prior to permitting investment in nonbanking activities. |
| Description and findings re EC5 | FBG entities may only undertake financial businesses or supporting businesses, as defined in the BOT Notification No. FPG. 8/2561: Regulations on Structure and Scope of Business of Financial Business Groups. As part of the approval process, the BOT requires a letter signed by the board of directors to certify that the board has considered all relevant risks and those adequate risk management policies, including a business continuity plan, controlling and monitoring systems, have been set. Under ongoing consolidated supervision, the bank is obligated to ensure that companies in the Financial Business Group strictly comply with the BOT’s regulations and the Group’s policies. |
| AC1 | The supervisor reviews major acquisitions or investments by other entities in the banking group to determine that these do not expose the bank to any undue risks or hinder effective supervision. The supervisor also determines, where appropriate, that these new acquisitions and investments will not hinder effective implementation of corrective measures in the future.18 Where necessary, the supervisor is able to effectively address the risks to the bank arising from such acquisitions or investments. |
| Description and findings re AC1 | Under Section 34 and Section 57 of FIBA, the BOT has the power to supervise and examine the financial institution, the parent company, subsidiary and affiliate of the financial institution as well as to prescribe other ratios to the Financial Business Group and to stipulate disclosure of information among each other. Changes made to the structure of the FBG, which includes major acquisitions and investments by other entities in the Group, require prior approval from the BOT, whereby the BOT applies the same criteria of approval for acquisition/investment by banks. In the approval process for such acquisition or investment, the BOT assesses the risk that may occur to the banking group. |
| Assessment of Principle 7 | Compliant |
| Comments | Cases reviewed denote that most applications are routine as they involve investing in financial business only and most are auxiliary functions such as Fintech subsidiaries. One denial involved an application to establish an FBG, but the applicant was unable to provide sound reasoning for the establishment and proof of sufficient financial resources. |
| Principle 8 | Supervisory approach. An effective system of banking supervision requires the supervisor to develop and maintain a forward-looking assessment of the risk profile of individual banks and banking groups, proportionate to their systemic importance; identify, assess and address risks emanating from banks and the banking system as a whole; have a framework in place for early intervention; and have plans in place, in partnership with other relevant authorities, to take action to resolve banks in an orderly manner if they become non-viable. |
| Essential criteria | |
| EC1 | The supervisor uses a methodology for determining and assessing on an ongoing basis the nature, impact and scope of the risks:
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| Description and findings re EC1 | The BOT supervises using a risk-based approach, in which (i) the impact that banks or banking groups have on the banking system, and (ii) the significant risks to which banks or banking groups are exposed to are monitored and assessed on an ongoing basis. Frequency and intensity of supervision of banks and banking groups will be based on the outcome of this assessment as follows: (i) Impact: the BOT assesses the importance of banks or banking groups to the financial system, particularly through their size, interconnectedness with other players in the system and impact to the economy. In addition, the BOT assesses banks’ lending to the various sectors of the economy. (ii) Risk: considering that business models differ between banks and banking groups, the BOT will:
At present, the BOT conducts onsite examinations of all deposit-taking institutions (banks, finance companies, credit foncier companies, and SFIs) annually and foreign branches/subsidiaries at least once every three years. Allocation of resources (number of supervisors and days) for onsite examination of each financial institution differs depending on its significance to the financial system. For example, more resources are allocated to the onsite examination of larger banks.21 In addition, the BOT allocates 1–3 supervisors upon the size and complexity of the banks for offsite examination to conduct ongoing supervision. Intensity of supervisory actions22 reflect the degree of supervisory concerns. For example, financial institutions with some serious supervisory concerns are subject to more closely monitoring by the BOT supervisors through more frequent contacts with the senior management, more frequent visits, and/or special onsite examination. For D-SIBs, the BOT has issued Notification 16/2560, “The Assessment Methodology and Supervisory Measures for Domestic Systemically Important Banks.” The Notification follows the framework established by the October 2012 paper issued by the Basel Committee on Banking Supervision. The BOT requires a higher loss absorvency capital percentage and sets the main indicators for identifying D-SIBs. The BOT meets with the D-SIB’ board of directors on annual basis to discuss examination results. The frequency of visits and meetings are risk-based, and adjusted based on bank response to orders and correction of outstanding issues. The BOT has various tools/measures which could be utilized according to the nature and severity of the problem to contain the problem once detecting the early sign of the problem (Prompt Preventive Action) and to take mandatory actions once the problem becomes more severe (Prompt Corrective Action). |
| EC2 | The supervisor has processes to understand the risk profile of banks and banking groups and employs a well defined methodology to establish a forward-looking view of the profile. The nature of the supervisory work on each bank is based on the results of this analysis. |
| Description and findings re EC2 | Under the BOT supervision, both offsite and onsite supervision are conducted throughout the year via a combination of activities, including regular contact with bank management, reviewing reports and statistical returns from the banks, and onsite visits. For each bank, a RM is assigned to continuously monitor the bank and promptly escalate issues or take actions deemed necessary. The Financial Institution System Analysis Division within the Supervision Group monitors the conditions and factors affecting the overall banking system and plays an important role in helping RMs identify issues, concerns or weaknesses of each bank. This ongoing process is aimed to enable supervisors to understand and update the risk profile of banks and banking groups, and to detect problems, promptly take preventive and corrective actions, as well as conducting early intervention to mitigate risks of an individual bank and contagion to the banking system. Under the risk-based framework, supervisors assess risks of SAs both on a solo and consolidated basis and keep monitoring potential risks that could come from non-SA activities. The BOT supervisors also incorporate forward-looking views of the banks’ profile, for example EWS tracking results, analysis business directions of Thai commercial banks, by monitoring leading indicators and EWI. EWI includes ratios of individual banks and the overall banking sector, for example financial position, profit and loss, capital (BIS ratio), credit risk, market risk, and liquidity risk). Supervisors also follow up on changes in the banks’ business strategies, industry, and environment from public sources, internal bank management reports and frequent contacts with the banks’ management. During the first quarter of every year, the BOT senior management and supervisors meet with the banks’ senior management to discuss their business strategies and exchange views on trends and changing environment affecting the banking sector. In addition, the BOT supervisors will regularly assess the banks’ vulnerability to likely stress events 1–2 years from now via supervisory stress test. Risk assessment of all banks is reviewed at least quarterly, while that of foreign branches/subsidiaries is reviewed at least semiannually. The quarterly risk assessment includes earnings, capital adequacy, governance, all major significant activities and other significant changes such as underwriting standards, launching new products or new core banking activities to the review net risk of each significant activity. If there are issues of supervisory concerns identified from the ongoing risk assessment and monitoring supervisors will include them in the supervisory scope. If the issues are serious and require prompt action, the BOT will communicate and/or require banks to take corrective actions |
| EC3 | The supervisor assesses banks’ and banking groups’ compliance with prudential regulations and other legal requirements. |
| Description and findings re EC3 | As part of the ongoing risk assessment, supervisors assess banks’ and banking groups’ compliance with prudential regulations and other legal requirements both at the SA and bank-wide level. Supervisors conduct offsite reviews of regulatory reports as well as banks’ committee minutes and internal reports from oversight functions, particularly compliance and internal audit functions, to monitor the banks’ track record of compliance /non-compliance with relevant laws and regulations, and to assess the quality of risk management and effectiveness of governance structure in addressing compliance risk. The banks’ internal audit function is required by the BOT policy statement on internal audit to report to the BOT any deficiency that could have serious adverse impacts on the banks’ financial condition and performance, and any non-compliance with the laws and regulations of the banks. Via regular contacts, onsite visits and onsite examinations, supervisors interview the banks’ audit committee, executives and staff and review the start-to-end process, from risk identification, assessment, monitoring, control and oversight, to assess effectiveness of compliance oversight functions and processes and to verify the issues identified from offsite review. If there is any major deficiency in the compliance process or structure, supervisors will communicate with the banks and require that they take actions and inform the progress to the BOT. Supervisors will follow up with banks to ensure that timely actions are taken to address such weakness and that control measures are put in place to prevent it from reoccurring. In 2016, the BOT conducted a thematic examination on banks’ compliance to raise awareness and enhance compliance practices to the industry standard. As part of offsite supervision, supervisors review information from various sources (such as newspapers, stock exchange, banks’ internal/audit reports, and regulatory reports) and update risk assessment of the banks and banking groups on an ongoing basis. The supervisors will also determine issues that have impact on bank’s operations and conduct onsite visits if there’s a significant issue. This information is gathered with data submitted by banks, current economic information and trend to prepare quarterly offsite analysis report. Ongoing supervision is conducted to monitor progress of remedial action recommended in previous onsite examination. |
| EC4 | The supervisor takes the macroeconomic environment into account in its risk assessment of banks and banking groups. The supervisor also takes into account cross-sectoral developments, for example in nonbank financial institutions, through frequent contact with their regulators. |
| Description and findings re EC4 | The BOT assesses risks of banks and banking groups, considering macroeconomic factors as well as cross-sectoral developments provided by internal units within the BOT and through exchanges of information and views with other regulators. Within the BOT The FSU is responsible for monitoring macroeconomic and financial sector conditions and the linkages within and between financial sector and other sectors, as well as assessing risks to financial stability. FSU may propose measures to mitigate systemic risks if deemed necessary. On a quarterly basis, FSU reports to the Financial Stability Subcommittee, a financial stability deliberative body within the BOT, which comprises the BOT governor as a chairperson and senior executives from various departments, including Financial Institutions Policy Group (FIPG) and Supervision Group. FSU, FIPG and Supervision Group regularly discuss macroeconomic conditions and the impacts to financial system, if there is any concern or significant issue, the supervisor will take that issue to setup the examination scope. FSU gets feedback from supervisors and shares its analysis work and closely collaborates with the FIPG and Supervision Group regarding financial stability issues and concerns. For example, FSU works closely with the Supervision Group to specify macroeconomic stress scenarios for supervisory stress tests. Furthermore, the Financial Institution System Analysis Division within the Supervision Group monitors the conditions and factors affecting the overall financial institution system. Its analysis work, such as the impact assessment of some specific macro events on financial institutions, is shared among the supervisors. In assessing risks of each bank, the BOT supervisors review analysis from FSU and the Financial Institution System Analysis Division, that provides perspective of macroeconomic and financial system conditions and the likely impact on the financial institution system. Occasionally, the BOT will conduct a thematic examination to assess the impact of a macroeconomic condition on financial institutions’ SA, such as real estate lending, installment loans, and unsecured lending. Significant issues or feedback received from onsite examination will be shared with FSU for the benefit of its analysis work. Coordination with other supervisory authorities The BOT closely coordinates with other supervisory authorities, particularly the SEC, the OIC, and the MOF, both at the policy and at working levels to discuss cross-sectoral developments and to assess risks within and across financial sectors, aiming to reduce systemic risk and regulatory arbitrage in the financial system, for examples jointly conducted mystery shopping for banking, securities and insurance products. High-level coordination emphasizes policy-making decisions, which has been achieved through cross-directorships, the FIPC, and the 3-Regulators Steering Committee. Mid-level coordination emphasizes execution and information exchange. The BOT, SEC, and OIC conduct semi-annual 3-Regulators Meetings since 2009. Matters of discussion include financial stability, financial sector development, areas of common regulatory and supervisory interest, and the ASEAN financial integration. |
| EC5 | The supervisor, in conjunction with other relevant authorities, identifies, monitors and assesses the build-up of risks, trends and concentrations within and across the banking system as a whole. This includes, among other things, banks’ problem assets and sources of liquidity (such as domestic and foreign currency funding conditions, and costs). The supervisor incorporates this analysis into its assessment of banks and banking groups and addresses proactively any serious threat to the stability of the banking system. The supervisor communicates any significant trends or emerging risks identified to banks and to other relevant authorities with responsibilities for financial system stability. |
| Description and findings re EC5 | The BOT, in collaboration with other regulators, performs an ongoing micro and macroprudential surveillance to identify, monitor and assess the build-up of risks, trends, and concentrations within and across the banking system, using various tools and approaches. Such analysis includes risk assessment of banks and banking groups. If there is any serious threat to the financial system, the BOT, in collaboration with relevant supervisory authorities, will proactively address such threat. The BOT communicates significant trends and emerging risks to relevant authorities and banks.
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| EC6 | Drawing on information provided by the bank and other national supervisors, the supervisor, in conjunction with the resolution authority, assesses the bank’s resolvability where appropriate, having regard to the bank’s risk profile and systemic importance. When bank-specific barriers to orderly resolution are identified, the supervisor requires, where necessary, banks to adopt appropriate measures, such as changes to business strategies, managerial, operational and ownership structures, and internal procedures. Any such measures take into account their effect on the soundness and stability of ongoing business. |
| Description and findings re EC6 | The BOT assesses banks and banking groups’ business strategies, managerial, operational and ownership structures, and internal procedures as part of licensing and ongoing supervision as well as assessing bank resolution, taking into consideration the banks’ risk profile and systemic importance. When structures or strategies pose risks to the banks, or when bank-specific barriers to orderly resolution are identified, the BOT will require, where necessary, the banks to adopt appropriate measures. Assessment during licensing and approval of financial conglomerate and new business In assessing qualifications of applicants for banking licenses, the BOT requires the applicants to provide detailed information about their parent companies, group structure, home country supervisory regime, as well as their business strategies, critical functions, managerial, operational and ownership structures, and internal procedures when they begin banking operations. In addition, before engaging in new business and products or making significant changes in managerial, operational and ownership structures, or establishing financial conglomerates, banks shall consult with the BOT, as in most cases the BOT acknowledgement or approval is required. Through this process, the BOT will evaluate whether such new business strategies and structures will create value to the Thai economy, and will not pose significant risks to the financial system stability. Assessment as part of ongoing supervision On an ongoing basis, the BOT supervisors assess banks and banking groups’ business strategies, structures, and key internal procedures. When the banks’ structures or strategies are deemed to pose risks to the banks and the banking system, bank-specific barriers to orderly resolution are identified, or key internal procedures are considered inadequate, the BOT supervisors will require, where necessary, the banks to adopt appropriate measures to address the issues. Recovery and resolution planning The BOT requires banks to submit recovery plans, conduct review of recovery plans at least annually and provide essential information for the development of resolution plans (The BOT Notification FPG No. 16/2561 and Guideline on Recovery Planning). The requirements are implemented in a phased approach, starting from domestic systemically important banks (D-SIBs) in 2018 expected to submit recovery plans by Q2 2019. The BOT will assess the submitted plans and provide feedbacks on the plans, including impediments to their implementation that should be addressed. To ensure that recovery planning requirements are tailored to suit Thailand’s context, prior to the issuance of the Notification and Guideline on Recovery Planning, the BOT engaged in close coordination with six banks (five of which are D-SIBs) in a pilot program in 2017 to develop and submit draft recovery plans. In addition, as part of recovery planning, banks are required to identify their critical functions, critical shared services including those undertaken by other entities within the group as well as the extent of interdependencies within the group. Feasibility of recovery options must be demonstrated, including options to separate or cease operations of certain parts of the business while maintaining operational continuity of critical services. Such information would facilitate resolvability assessment for development of the resolution plans. Where barriers to orderly resolution are identified, the bank will be informed and encouraged to adopt appropriate measures to address the issues. Power to take preventive and corrective actions The BOT monitors key indicators and assesses financial institutions financial position closely where there is a sign of weakness. BOT has power to take prompt preventive action through several measures, such as requiring the bank to improve internal control, slow down its business expansion, for instance when the bank lowered underwriting standards to increase housing loan exposures, BOT immediately notified the concern to chairman of the board. Where it is deemed that condition or operation of a bank may cause damage to the public interest, the FIBA empowers the BOT to take corrective actions, which include requiring the bank to rectify its condition or operation, to replace some or all of the bank’s board of directors and/or management, and to temporarily suspend the bank’s operations partially or fully. |
| EC7 | The supervisor has a clear framework or process for handling banks in times of stress, such that any decisions to require or undertake recovery or resolution actions are made in a timely manner. |
| Description and findings re EC7 | The BOT has developed a crisis management framework, including workflows which lay out key steps during times of distress as well as involved parties and a range of supervisory actions for each circumstance, depending on type, stage, and severity of the problem. This is to ensure that necessary decisions or actions are made in a timely and appropriate manner. The key steps include:
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| EC8 | Where the supervisor becomes aware of bank-like activities being performed fully or partially outside the regulatory perimeter, the supervisor takes appropriate steps to draw the matter to the attention of the responsible authority. Where the supervisor becomes aware of banks restructuring their activities to avoid the regulatory perimeter, the supervisor takes appropriate steps to address this. |
| Description and findings re EC8 | The BOT monitors banks and banking groups on an ongoing basis both on a solo and consolidated basis and closely coordinates with other relevant supervisory authorities, as well as the Office of the Electronic Transaction Commission (E-payment regulator) to discuss and collaborate on cross-sectoral issues, including bank-like activities and regulatory arbitrage. For example, the BOT has been working closely with the SEC to set scope of FX activities and relevant regulations for securities firms applying for FX licenses. Normally banks consult with the BOT before they launch new products or new activities. Nevertheless, if the BOT finds that banks restructure their activities to avoid regulations, the BOT will require the banks to stop/suspend those activities until the banks have transparently declared such activities and complied with the necessary regulations. In addition, if the BOT finds that bank-like activities are performed outside of regulatory perimeter (for example, e-money and FX money exchange services), the BOT will take actions to address it or bring such matter to the attention of responsible authorities. |
| Assessment of Principle 8 | Compliant |
| Comments | The BOT has established a supervisory process that supports the risk-based supervisory approach. The supervisory approach process was discussed and reviewed in detail using the risk matrix that rates the banks on their risk profile and forms the basis for developing the supervisory scope for the bank. The examination reports are comprehensive, and recommendations are followed-up with bank management and the Board as warranted. Banking groups and their structure/affiliates are incorporated to identify any risk feedback channels. Further linking of benchmarks, and analysis results to scope of supervisory activities for individual banks would continue development of risk-focused supervision. |
| Principle 9 | Supervisory techniques and tools. The supervisor uses an appropriate range of techniques and tools to implement the supervisory approach and deploys supervisory resources on a proportionate basis, taking into account the risk profile and systemic importance of banks. |
| Essential criteria | |
| EC1 | The supervisor employs an appropriate mix of onsite25 and offsite26 supervision to evaluate the condition of banks and banking groups, their risk profile, internal control environment and the corrective measures necessary to address supervisory concerns. The specific mix between onsite and offsite supervision may be determined by conditions and circumstances of the country and the bank. The supervisor regularly assesses the quality, effectiveness and integration of its onsite and offsite functions, and amends its approach, as needed. |
| Description and findings re EC1 | The BOT conducts ongoing supervision comprising a mix of offsite and onsite activities and occasional thematic examinations to evaluate the condition of banks and banking groups, their risk profile and internal control environment, and corrective measures necessary to address supervisory concerns. Offsite supervision is an ongoing monitoring process, in which banks and banking groups’ financial conditions and risk indicators, developments and trends in the banks and the banking sector are reviewed and analyzed. Supervisors review information from various sources (such as newspapers, stock exchange, banks’ internal/audit reports and regulatory reports) and update risk assessments of the banks and banking groups on a regular basis, at least quarterly. In addition, supervisors are regularly in contact with bank management (via regular meetings) as well as with external auditors and relevant supervisors. If there are any significant concerns/issues identified, the BOT supervisors will discuss with the banks’ management and follow up in a timely manner. All banks are subject to the same base level of offsite supervision, but the focus, frequency and intensity of onsite supervision for each bank or banking group is risk-based, reflecting the bank’s significance to the banking system, SA (both on a solo and consolidated basis), and the degree of supervisory concerns as follows: The BOT conducts onsite examinations of all Thai deposit-taking institutions (banks, finance companies, credit foncier companies, and SFIs) annually and foreign branches/subsidiaries at least once every three years. More resources (number of supervisors and days) are allocated for onsite supervision of larger banks. During onsite visit/examination, supervisors verify key issues/concerns identified from offsite review/risk assessment and assess adequacy and effectiveness of the banks’ operational management, risk management, oversight function and compliance for each SA, using a combination of a top-down approach (interviews to assess end-to-end bank processes) and bottom-up approach (transaction testing). The BOT supervisors may conduct an onsite visit/examination of non-bank subsidiaries of the banks, such as leasing company, insurance company, and securities company, if they are significant to the banks. Banks with serious supervisory concerns are subject to close monitoring through more frequent contacts with senior management, more frequent visits, or special onsite examination. Occasionally, the BOT will conduct a thematic examination to assess industry practices on areas, such as internal audit and compliance, or assessing possible impact of a macroeconomic situation on the banks’ SA, such as real estate lending, installment lending, credit card and personal lending. All significant findings and recommendations are communicated to the bank, and the bank is required to promptly address concerns. After communicating examination results to the Board, supervisors will monitor corrective action by contacting the banks’ points of contact. The banks’ Internal audit and compliance functions review accuracy, reliability and timeliness of information before submitting documents on remedial action to BOT. If issues are identified on progress, supervisors will consider onsite visits to verify action taken. The BOT regularly assesses the quality, effectiveness and integration of the onsite and offsite supervision and amends the approach, as needed. Before 2016, offsite and onsite supervision functions were performed under different teams and departments. Since 2016, the BOT has combined onsite and offsite supervision functions for greater integration of the functions. Both functions are conducted by a team under an assigned RM. In addition, to ensure the quality and consistency of supervision and risk assessment across banks, particularly onsite supervision, findings and composite rating assigned to each bank are subject to peer comparison and review by a panel of senior managers and department directors in the Supervision Group (Financial Institutions Examination Report Screening Working Committee) and approved by the BOT’s top executive subcommittee chaired by the Deputy Governor of Financial Institutions Stability (Financial Institutions Examination Development Subcommittee). |
| EC2 | The supervisor has a coherent process for planning and executing onsite and offsite activities. There are policies and processes to ensure that such activities are conducted on a thorough and consistent basis with clear responsibilities, objectives and outputs, and that there is effective coordination and information sharing between the onsite and offsite functions. |
| Description and findings re EC2 | There is a dedicated department within the Supervision Group (“Planning and Examiners Development Department) responsible for planning annual onsite activities, including thematic examinations. Such annual plan is approved by the Financial Institutions Examination Development Subcommittee. The Planning and Examiners Development Department is also responsible for ensuring that such activities are conducted on a thorough and consistent basis with clear responsibilities, objectives and outputs by developing supervision standards/manuals, regularly updating the supervisors with new knowledge and development in banking supervision, enhancing competency of supervisors via training and knowledge sharing, and arranging processes to ensure the quality and consistency of supervision and risk assessment across banks via a panel of senior directors and directors in the Supervision Group i.e., the Financial Institutions Examination Report Screening Working Committee and the Financial Institutions Examination Development Subcommittee. As offsite and onsite functions are conducted under the same team with a dedicated RM, coordination and information sharing between onsite and offsite functions are very effective. Furthermore, the Financial Institutions System Analysis Division within the Supervision Group, which is assigned to monitor the conditions and factors affecting the overall banking system, plays a key role in helping RMs to identify issues, concerns and weaknesses of each bank. |
| EC3 | The supervisor uses a variety of information to regularly review and assess the safety and soundness of banks, the evaluation of material risks, and the identification of necessary corrective actions and supervisory actions. This includes information, such as prudential reports, statistical returns, information on a bank’s related entities, and publicly available information. The supervisor determines that information provided by banks is reliable27 and obtains, as necessary, additional information on the banks and their related entities. |
| Description and findings re EC3 | The BOT employs a variety of information to assess inherent risks and effectiveness of the banks’ risk management on an ongoing basis and obtain, as necessary, additional information on the banks and their related entities. All the information submitted by the banks is subject to a validation process as well as review by supervisory staff to ensure its reliability. Since BOT supervision is organized in teams performing both onsite and offsite activities, the analyses results are used for follow-up and determining need and frequency for onsite visits and scope. Supervisors assess inherent risks and effectiveness of the banks’ risk management on an ongoing basis using information received from banks and other sources as well as information from onsite examinations. Banks are required to submit information (e.g., financial statements, off balance sheet items, deposits, loans, NPLs, loan loss provisions, capital and risk-weighted assets, liquidity assets, and market risk report) to the BOT on a regular basis. The frequency of the data submission depends on characteristics of the information. The BOT also requires the banks or companies within the same financial group to provide additional information, as necessary, e.g., internal reports and board/committee minutes on a regular basis, and a survey or questionnaire on an ad-hoc basis. To ensure its validity and integrity, all the information submitted by the banks through Data Management System (DMS) is subject to a three-stage validation process by the Statistics and Information Systems Department within the BOT. Moreover, supervisors review accuracy and completeness of regulatory reports and information submitted by the banks. During onsite examination, supervisors review the banks’ information systems and regulatory reporting process to ensure that they are reliable. If the BOT determines that the information provided by the banks is incomplete or ambiguous, the BOT has the power under Section 71 of FIBA to appoint an external auditor or specialist to conduct an independent audit of such banks and report the results thereof to the BOT at the expense of the bank. Banks that fail to comply with Section 71 of FIBA regarding information provision to the BOT are subject to fines under Section 128 of FIBA. The banks’ directors or executives are also guilty of offense unless they can prove that they are not involved or have taken all reasonable steps to comply with the law (Section 132 of FIBA). |
| EC4 | The supervisor uses a variety of tools to regularly review and assess the safety and soundness of banks and the banking system, such as:
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| Description and findings re EC4 | The BOT reviews and assesses safety and soundness of banks and the banking system on an ongoing basis using an extensive set of tools. The findings/concerns and assessment of such review are communicated to the banks in a timely manner, and the banks are required to take prompt actions to address them. Under the risk-based approach, supervisors assess overall inherent risks and risk management of the banks, as well as their corporate governance/compliance, capital, and ability to generate earnings. The assessment reviews the bank business model, focusing on their SA, and includes extensive analyses of quantitative and qualitative information, such as financial statements as well as key risk indicators, peer comparison, and top 100 large borrowers, as well as information about the bank’s corporate governance, risk management, and other control functions observed during regular onsite examinations and from internal reports and minutes. Occasionally, the BOT conducts thematic examinations to assess industry practices, such as internal audit, compliance, or to assess the impact of macroeconomic factors on the banks’ SA, such as real estate lending. After concluding an examination, BOT shares results with the banks. BOT also communicates thematic and annual examination results during the annual meeting with the bank and how they will be covered in the supervisory program for the upcoming year. To support supervisory work, the Financial Institution System Analysis Division within the Supervision Group conducts banking sector analyses, such as analysis of the banking sector’s key figures, business sector analysis, impact assessment of some specific macro events on banks, as well as analysis of top 100 large group borrowers. Furthermore, the BOT supervisors include stress test results in risk assessments of the banks. As part of the assessment, The BOT supervisors review the banks’ ICAAP stress testing approaches and assumptions and evaluate the banks’ risk management and capital management policies, as well as their contingency plans for stressed situations. The BOT also periodically conducts thematic banking sector-wide stress test and may also require banks to conduct stress tests under some specific scenarios. Moreover, The BOT requires banks to conduct annual supervisory stress test to monitor impact of major risks to Thai banks and the BOT provides feedback of the supervisory stress test examination result to the individual bank. The results of stress testing will be incorporated in determining composite rating and the BOT may instruct banks to submit capital plan. If it deems necessary, the BOT will instruct the banks to increase their capital. To ensure the quality and consistency of supervision and risk assessment across banks, key findings and composite rating assigned to each bank are subject to peer comparison and review by a panel of senior directors and directors in the Supervision Group (Financial Institutions Examination Report Screening Working Committee) and approved by the BOT’s top executive subcommittee (Financial Institutions Examination Development Subcommittee). All significant findings as well as the BOT supervisors’ recommendations derived from any of the above analyses are communicated to the banks in an appropriate and a timely manner, and the banks are required to promptly take actions to address such issues or concerns. |
| EC5 | The supervisor, in conjunction with other relevant authorities, seeks to identify, assess and mitigate any emerging risks across banks and to the banking system as a whole, potentially including conducting supervisory stress tests (on individual banks or system-wide). The supervisor communicates its findings as appropriate to either banks or the industry and requires banks to take action to mitigate any particular vulnerabilities that have the potential to affect the stability of the banking system, where appropriate. The supervisor uses its analysis to determine follow-up work required, if any. |
| Description and findings re EC5 | The BOT, in coordination with other relevant authorities (e.g., the SEC and the OIC) works to identify, assess and mitigate any emerging risks across banks and the financial system through ongoing surveillance and using various tools and approaches, including stress tests. The BOT communicates its findings to banks and the industry and as appropriate banks take actions to mitigate vulnerabilities or risks that could potentially affect financial system stability. Coordination with relevant authorities BOT, in collaboration with other regulatory authorities, conducted integrated macro- and micro-prudential surveillance to identify, assess and mitigate any emerging risks across banks and to the financial system both at the policy and at working levels. At the working level, the FSU, Financial Institutions Policy, supervision groups and other relevant functions in the BOT, in coordination with other authorities regularly monitor and analyses financial institutions and financial system conditions to identify, assess and mitigate any emerging risks across banks and the financial system. The Financial Stability Subcommittee, which comprises the BOT governor as a chairperson and senior executives from various departments, including the Financial Institutions Policy Group and Supervision Group, serves as a management forum within the BOT where functions responsible for macro- and microprudential surveillance and supervision come to share information and analyses to identify and assess potential risks to the financial systems and discuss financial stability issues. At the policy level, semi-annual joint meetings between the MPC and FIPC serve as the main forum for the BOT and relevant bodies, such as SEC, OIC, and FPO of the MOF, to discuss financial stability issues. Supervisory Tools and Approaches BOT uses various tools and approaches to identify, assess and mitigate potential risks across banks and to the banking system. For example, financial information from regulatory reports and financial soundness indicators (along with macroeconomic indicators28) are regularly monitored. Peer group analysis as well as impact assessment of macroeconomic and industry-specific events/conditions are regularly conducted to identify potential risks across banks and to the banking system. In addition, the BOT requires banks to conduct bank-wide stress test on an annual basis to assess potential impact of mild, moderate and severe stress scenarios on the banks’ credit risk (and loan loss provision), market risk, liquidity risk and capital in the next 3 years. In 2016, the BOT jointly with the SEC and OIC developed stress scenarios (Risk Assessment Matrix: RAM) and conducted stress tests on scenarios to assess potential risks across financial institutions and to the financial system as a whole. Moreover, the BOT periodically conducts thematic banking sector-wide stress test and require banks to conduct stress tests under some specific scenarios, such as (i) the Hamburger crisis in 2007, (ii) lowering the deposit protection limit in 2011, (iii) the major flood in 2011, and (iv) the QE tapering in 2013. Communication with banks and industry The BOT communicates its findings to banks and the industry as appropriate via various channels, including regular forum, such as annual meeting with banks’ senior management, the semi-annual press releases of the Joint MPC-FIPC Meeting and the FSR published annually to serve as tools to communicate the overall risk assessment and concerns with regards to financial stability to the public. Actions taken and follow up work Based on such analyses and stress test results, BOT requires banks to mitigate vulnerabilities that can potentially affect the banking system stability. For example, the BOT requested banks that could potentially have insufficient loan loss provisions under certain stress scenarios, to build up additional provisions. In addition, when some issuers of unrated debentures defaulted, and the market started to react, the BOT and SEC coordinated with banks and arrangers of unrated bond issuers, to come up with measures to lessen the adverse impact of the situation and to prevent spillover to solvent unrated bond issuers. The BOT supervisors also incorporate such analyses and stress test results to determine follow up work on banks and the banking group which may have some areas of vulnerabilities. |
| EC6 | The supervisor evaluates the work of the bank’s internal audit function, and determines whether, and to what extent, it may rely on the internal auditors’ work to identify areas of potential risk. |
| Description and findings re EC6 | Supervisors evaluate the work and effectiveness of banks’ internal audit function as part of risk assessment at the SA and bank-wide levels. The assessment of internal audit function includes its roles and responsibilities, its independence and authority, adequacy and qualification of its resources, audit methodology and coverage (whether it is risk-based and covers all the significant activities/risks of the banks), quality of its findings and reports, escalation of issues, and follow-up of the findings. If there is any major deficiency found in the internal audit function, supervisors will raise concerns to the banks’ management and audit committee and require the banks to take actions to address it. As a general practice, internal audit functions of banks are required to conduct their work with professional proficiency and comply with the BOT policy statement on internal audit. To raise individual bank internal audit to industry standards, BOT conducted thematic examinations in 2016. Gaps that were found during the thematic examinations were communicated to the banks, and banks were required to take appropriate actions to close the gaps. |
| EC7 | The supervisor maintains sufficiently frequent contacts as appropriate with the bank’s Board, non-executive Board members and senior and middle management (including heads of individual business units and control functions) to develop an understanding of and assess matters such as strategy, group structure, corporate governance, performance, capital adequacy, liquidity, asset quality, risk management systems and internal controls. Where necessary, the supervisor challenges the bank’s Board and senior management on the assumptions made in setting strategies and business models. |
| Description and findings re EC7 | BOT maintains frequent contact with banks’ senior management as well as heads of key business units, risk management, and internal audit and compliance to develop understanding of bank risks. Regular meetings with the bank management include:
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| EC8 | The supervisor communicates to the bank the findings of its on- and offsite supervisory analyses in a timely manner by means of written reports or through discussions or meetings with the bank’s management. The supervisor meets with the bank’s senior management and the Board to discuss the results of supervisory examinations and the external audits, as appropriate. The supervisor also meets separately with the bank’s independent Board members, as necessary. |
| Description and findings re EC8 | Supervisors will communicate and discuss with bank management results of its analyses in a timely manner and for significant issues or concerns, the BOT communicates through a formal letter or report and require banks to respond, take actions to address the issues, and report the progress to the BOT. The BOT meets with senior management and the Board to discuss the results of onsite examinations and external audits, as appropriate. After completion of an onsite examination, an exit meeting with management is held to communicate key findings and recommendations and to provide an opportunity for management to respond. Once the examination report is finalized and approved by the relevant panel and committee, the BOT sends the formal letter and examination report to the banks’ CEO and requires the Chairman of the Board and all members of the Board to sign the acknowledgement form within 15 days from the date of the board meeting. For D-SIBs, the BOT meets with the board of directors annually. Meetings and exchanges with management occur on an ongoing basis. BOT meets separately with independent board members, as necessary. For example, the BOT met with the banks’ audit committee, which all the member are independent directors, to discuss key findings and recommendations from the thematic examination on internal audit and compliance practices. |
| EC9 | The supervisor undertakes appropriate and timely follow-up to check that banks have addressed supervisory concerns or implemented requirements communicated to them. This includes early escalation to the appropriate level of the supervisory authority and to the bank’s Board if action points are not addressed in an adequate or timely manner. |
| Description and findings re EC9 | Supervisory concerns identified from the BOT’s on- and offsite supervision are communicated to the banks’ board and/or senior management in a timely manner. The banks are required to provide details of corrective actions within a specified timeframe and expected to take corrective action promptly. For onsite examination findings, the banks are typically required to report remedial plan progress within 30 days from the issuance date of the BOT letter. The BOT supervisors will follow up on banks’ remedial actions until the supervisory concerns are satisfactorily addressed, and the key follow-up issues will be included in the scope of offsite and onsite supervision activities of such banks. For significant internal control weaknesses, the banks may also be required to provide quarterly status updates to the BOT. According to the BOT policy statement on internal audit, banks’ internal audit function is responsible for following up on remedial actions of the banks. If remedial actions taken by the banks are not satisfactorily addressed the supervisory concerns, internal auditors must inform the banks’ audit committee and the board of directors as well as the BOT. Within the BOT, serious supervisory concerns are escalated by department heads to the assistant governor, the deputy governor, and/or the governor, respectively. In addition, such concerns may be discussed and deliberated in other relevant committee meetings If the issues seem to pose adverse development. |
| EC10 | The supervisor requires banks to notify it in advance of any substantive changes in their activities, structure and overall condition, or as soon as they become aware of any material adverse developments, including breach of legal or prudential requirements. |
| Description and findings re EC10 | Under FIBA, banks must notify the BOT in advance and, in some certain cases, shall seek the BOT’s approval for significant changes in the banks’ activities, structure and overall conditions. The banks must notify the BOT as soon as they become aware of any material adverse developments, including breach of legal or prudential requirements. Significant changes in banks’ activities and group structure shall be approved by the BOT. In practice, banks normally consult with the BOT before submitting their plans for BOT approval. For example,
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| EC11 | The supervisor may make use of independent third parties, such as auditors, provided there is a clear and detailed mandate for the work. However, the supervisor cannot outsource its prudential responsibilities to third parties. When using third parties, the supervisor assesses whether the output can be relied upon to the degree intended and takes into consideration the biases that may influence third parties. |
| Description and findings re EC11 | BOT does not outsource prudential responsibilities to third parties. According to Section 85 of FIBA, the BOT has the power to appoint third parties as financial institution supervisors, but up until now the BOT has never done so. |
| EC12 | The supervisor has an adequate information system which facilitates the processing, monitoring and analysis of prudential information. The system aids the identification of areas requiring follow-up action. |
| Description and findings re EC12 | The BOT uses a variety of information systems, applications, databases, and tools to support supervisors in the processing, monitoring and analysis of information, as well as tracking of issues and identification of areas requiring follow-up actions. Regular quantitative information from banks is electronically submitted via Data Management System (DMS). The program “Business Objects” is also being employed to facilitate queries, reporting, and analysis of the banks’ financial data, such as peer comparison, trend analysis. Moreover, statistical and analysis tools, such as Tableau and SAS, are used to help analyze micro-level / big data and facilitate advanced analyses. Supervisory tools The customized system called Financial Institutions Monitoring and Analysis System (FIMAS) has been developed to provide the BOT supervisors a comprehensive set of financial and risk data as well as early warning indicators of each individual banks and the overall banking sector (in areas of financial position, profit and loss, capital, credit risk, market risk, liquidity risk, operational risk) and peer analysis template. Moreover, Electronic Working Paper (EWP) system has been developed in-house to support the BOT supervisors throughout the entire ongoing supervision process, i.e., planning supervisory activities, recording key information and key findings and recommendations, monitoring and tracking issues, as well as identifying areas requiring follow-up actions. FI@aClick also serves as an MIS for relationship managers and the BOT senior management. |
| Additional criteria | |
| AC1 | The supervisor has a framework for periodic independent review, for example by an internal audit function or third party assessor, of the adequacy and effectiveness of the range of its available supervisory tools and their use, and makes changes as appropriate. |
| Description and findings re AC1 | Independent internal audit function of the BOT periodically reviews key processes of banking supervision function to assess adequacy and effectiveness of its risk management and control. The Chief Audit Executive, the head of internal audit function, reports to the Audit Committee. The internal audit function deploys a risk assessment approach to determine risk profile, together with an audit area and frequency. Generally, bank regulation and supervision are audited every year in various functions based on their own risk inherited. For instance, banks’ onsite and offsite examination in 2015, compliant management in 2016, SFIs supervision, IT supervision, payment system, and school of supervisors in 2017, Fintech, ongoing supervision, and market conduct in 2018. |
| Assessment of Principle 9 | Compliant |
| Comments | Offsite and onsite reviews are performed by the same supervisory teams under a relationship manager and results in ongoing monitoring. A review of recommendations to banks reveals that the supervisory approach is comprehensive, and the supervisory tools yield a wide range of recommendations from governance to financial issues. Onsite inspections continue to evolve away from an audit or compliance and are addressing qualitative factors, such as the adequacy of board policies are receiving increased attention from examiners. |
| Principle 10 | Supervisory reporting. The supervisor collects, reviews and analyses prudential reports and statistical returns29 from banks on both a solo and a consolidated basis, and independently verifies these reports through either onsite examinations or use of external experts. |
| Essential criteria | |
| EC1 | The supervisor has the power30 to require banks to submit information, on both a solo and a consolidated basis, on their financial condition, performance, and risks, on demand and at regular intervals. These reports provide information such as on- and off-balance sheet assets and liabilities, profit and loss, capital adequacy, liquidity, large exposures, risk concentrations (including by economic sector, geography and currency), asset quality, loan loss provisioning, related party transactions, interest rate risk, and market risk. |
| Description and findings re EC1 | The BOT has the power to require banks as well as their parent company, subsidiaries, or other affiliated companies under the financial group to submit reports or information at any interval or from time to time, and in any form as prescribed by the BOT (Section 71 of FIBA and the BOT Notification No. ITG. 11/2559: Submission of Reports to the BOT). In addition, the BOT supervisors have the power to require the banks’ directors, employee, auditor, and any person collecting or processing the banks’ data to make a statement concerning the banks’ business, assets and liabilities, or to deliver copies of, or produce, information, accounts, documents, or other evidence (Section 85 of FIBA). In this respect, the BOT requires banks to submit information about their financial condition, performance, and risks on both a solo and a consolidated basis as follows: (1) Reports and documents including supervisory reports/returns via the BOT’s data management system (DMS), minutes of the banks’ committee meetings as well as internal management/risk reports, covering such information as:
(2) Report of the events, which may significantly affect the banks’ reputation, financial condition, or liquidity, such as cyber-attack, fraud, or serious negligence. The banks are required to report to the BOT promptly upon occurrence or acknowledgement of the events and no later than 24 hours after acknowledgment of the events. (3) Additional information as requested by the BOT. |
| EC2 | The supervisor provides reporting instructions that clearly describe the accounting standards to be used in preparing supervisory reports. Such standards are based on accounting principles and rules that are widely accepted internationally. |
| Description and findings re EC2 | The BOT requires banks to prepare financial statements based on Thai accounting standards and internationally accepted accounting principles or generally accepted accounting principles, as applicable (Section 66 of FIBA and the BOT Notification No. FPG. 20/2558 and the BOT Notification No. FPG. 21/2558). |
| EC3 | The supervisor requires banks to have sound governance structures and control processes for methodologies that produce valuations. The measurement of fair values maximizes the use of relevant and reliable inputs and is consistently applied for risk management and reporting purposes. The valuation framework and control procedures are subject to adequate independent validation and verification, either internally or by an external expert. The supervisor assesses whether the valuation used for regulatory purposes is reliable and prudent. Where the supervisor determines that valuations are not sufficiently prudent, the supervisor requires the bank to adjust its reporting for capital adequacy or regulatory reporting purposes. |
| Description and findings re EC3 | The BOT requires banks to comply with accounting standards, including valuation practices, and have sound governance structure and control process for methodologies that produce valuations. BOT will assess whether valuations used for regulatory purpose are reliable and prudent. Where it is found that valuations are not sufficiently prudent, the BOT will require banks adjust their reporting, especially for capital adequacy or regulatory reporting purposes.
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| EC4 | The supervisor collects and analyses information from banks at a frequency commensurate with the nature of the information requested, and the risk profile and systemic importance of the bank. |
| Description and findings re EC4 | The BOT regularly collects information from banks (both supervisory reports and internal reports and committee minutes of the banks) on a daily, bi-weekly, monthly, quarterly, semi-annual, or annual basis depending on nature of the information. For example, information on assets, liabilities and off-balance sheet items is submitted monthly, while some of market risk and liquidity risk information, such as FX transactions, is submitted daily. Additional reporting requirements are applied for domestic systemically important banks (D-SIBs). For example, starting in 2019, D-SIBs are required to submit information on a solo and consolidated basis monthly (while other banks submit the information on a quarterly basis). Moreover, banks with a high-risk profile or significant supervisory concerns may be required to submit additional information or submit information at greater frequency to facilitate close monitoring. For example, banks with liquidity issues are required to submit liquidity condition information to the BOT twice a day, one in the morning and one in the afternoon. The BOT has utilized both macro- and micro-level data in conducting in-depth analyses to support the ongoing supervision. For example, by linking several sources of micro-level data such as bank loan, bond issuance, external debt, and equity issuance, to better understand funding structure and assess risks of the banks’ corporate borrowers and potential impact on the banking sector. Another example includes the use of loan-level data to analyze behavior of the banks’ borrowers such as percent utilization of credit lines, and its relationship with the borrowers’ likelihood to default and the banks’ credit risk. |
| EC5 | In order to make meaningful comparisons between banks and banking groups, the supervisor collects data from all banks and all relevant entities covered by consolidated supervision on a comparable basis and related to the same dates (stock data) and periods (flow data). |
| Description and findings re EC5 | The BOT collects and reviews data from banks on both a solo and a consolidated basis. The data templates are the same, with the same dates and periods. The BOT also specifies common cut-off dates and reporting periods across banks for the quantitative data to be submitted to the BOT. Hence, the data from all banks and all relevant entities covered by consolidated supervision are collected on a comparable basis and allow meaningful comparisons between solo and a consolidated basis as well as across banks and banking groups. |
| EC6 | The supervisor has the power to request and receive any relevant information from banks, as well as any entities in the wider group, irrespective of their activities, where the supervisor believes that it is material to the condition of the bank or banking group, or to the assessment of the risks of the bank or banking group or is needed to support resolution planning. This includes internal management information. |
| Description and findings re EC6 | The BOT has the power to require banks and their parent company, subsidiaries, or other affiliated companies within the financial group to submit reports or information as prescribed by the BOT (Section 71 of FIBA). Moreover, the BOT has the power to appoint supervisors to examine the business, assets, and liabilities of banks and their parent company, subsidiaries, and other affiliated companies in the financial group as well as debtors and related parties of the banks. In doing so, the BOT supervisors have the power to order the banks’ director, officer or employee, auditor and any person collecting or processing the banks’ data to make a statements about the business, assets and liabilities of the banks, or to deliver copies of, or produce, information, accounts, documents, seals or other evidence to the BOT (Section 85 of FIBA). As part of ongoing supervision, the BOT periodically requests and receives information from banks and banking groups, as well as from entities in the wider group, which are significant to the condition of the banks or banking groups. Such information includes minutes of committee meetings, internal management/risk reports. |
| EC7 | The supervisor has the power to access31 all bank records for the furtherance of supervisory work. The supervisor also has similar access to the bank’s Board, management and staff, when required. |
| Description and findings re EC7 | BOT supervisors have the power to order the banks’ director, officer or employee, auditor and any person collecting or processing the banks’ data to make a statement about the business, assets and liabilities of the banks, or to deliver copies of, or produce, information, accounts, documents, seals or other evidence to the BOT (Section 85 of FIBA). |
| EC8 | The supervisor has a means of enforcing compliance with the requirement that the information be submitted on a timely and accurate basis. The supervisor determines the appropriate level of the bank’s senior management is responsible for the accuracy of supervisory returns, imposes sanctions for misreporting and persistent errors, and requires that inaccurate information be amended. |
| Description and findings re EC8 | Under FIBA, the BOT has the power to enforce compliance with the requirement that the information be submitted on a timely and accurate basis as follows:
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| EC9 | The supervisor utilizes policies and procedures to determine the validity and integrity of supervisory information. This includes a program for the periodic verification of supervisory returns by means either of the supervisor’s own staff or of external experts.32 |
| Description and findings re EC9 | The BOT’s policies and procedures to determine the validity and integrity of supervisory information are as follows. For data submitted electronically via DMS, the Statistics and Information Systems Department within the BOT performs data validation using automated in-built checks to detect data anomalies. Three tiers of validation are conducted: (i) Basic validation—check data types and possible values as required under each dataset; (ii) Complex validation— reconcile data within dataset; and (iii) Cross validation—reconcile data with other datasets. Dedicated statistical staff also verifies data anomalies with the banks and the BOT supervisors overseeing those banks. Moreover, the BOT supervisors cross-validate information from the supervisory returns with other information sources and conduct sampling test to ensure that the returns submitted are accurate. During onsite examination, the BOT supervisors also assess adequacy and effectiveness of the banks’ information and reporting systems in aggregating, processing, and reporting the information on a complete, accurate and timely basis. |
| EC10 | The supervisor clearly defines and documents the roles and responsibilities of external experts,33 including the scope of the work, when they are appointed to conduct supervisory tasks. The supervisor assesses the suitability of experts for the designated task(s) and the quality of the work and takes into consideration conflicts of interest that could influence the output/recommendations by external experts. External experts may be utilized for routine validation or to examine specific aspects of banks’ operations. |
| Description and findings re EC10 | The BOT does not outsource prudential responsibilities to third parties. Under Section 85 of FIBA, the BOT has the power to appoint third parties as bank supervisors, but up until now the BOT has never done so. |
| EC11 | The supervisor requires that external experts bring to its attention promptly any material shortcomings identified during the course of any work undertaken by them for supervisory purposes. |
| Description and findings re EC11 | Under FIBA and the BOT regulations, banks’ external auditors are required to promptly bring to the BOT’s attention any material shortcomings identified during any work undertaken by them. Particularly,
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| EC12 | The supervisor has a process in place to periodically review the information collected to determine that it satisfies a supervisory need. |
| Description and findings re EC12 | The BOT has an internal process to review whether information and reports collected from banks satisfy supervisory needs. For example, starting in 2014, banks to submit loan-level Small and Medium Enterprise (SME) data for both supervisory and financial access policy purposes. The BOT reviews the information received via the DMS to update data requirements and improve clarity of definitions/instructions on an annual basis. |
| Assessment re Principle 10 | Compliant |
| Comments | BOT collects financial reports on a regular basis and has authority to collect supplemental information as warranted. Information collected enables BOT to monitor the banking group and to produce detailed risk indicator analyses. A review of reports provided a broad overview of the banking system and detailed loan portfolio breakdowns and trends. |
| Principle 11 | Corrective and sanctioning powers of supervisors. The supervisor acts at an early stage to address unsafe and unsound practices or activities that could pose risks to banks or to the banking system. The supervisor has at its disposal an adequate range of supervisory tools to bring about timely corrective actions. This includes the ability to revoke the banking license or to recommend its revocation. |
| Essential criteria | |
| EC1 | The supervisor raises supervisory concerns with the bank’s management or, where appropriate, the bank’s Board, at an early stage, and requires that these concerns be addressed in a timely manner. Where the supervisor requires the bank to take significant corrective actions, these are addressed in a written document to the bank’s Board. The supervisor requires the bank to submit regular written progress reports and checks that corrective actions are completed satisfactorily. The supervisor follows through conclusively and in a timely manner on matters that are identified. |
| Description and findings re EC1 | If there are any issues/concerns identified, BOT communicates and raises concerns to management and, where appropriate, to the Board at an early stage via appropriate means (e.g., email, phone calls, discussions, meetings, written documents). For foreign bank branches and subsidiaries, the BOT has regularly communicated issues to regional headquarters. Occasionally, the BOT meets and discusses with home regulators before going onsite. In this regard, the banks are required to provide details of remedial actions to address such concerns within a specified timeframe and are expected to take such actions in a timely manner. For significant issues or concerns, the BOT will communicate with the banks’ management and the Board via formal letter and/or report, and requires the banks to respond, take corrective actions to address the issues, as well as report the progress to the BOT. BOT sends the formal letter and examination report to the bank’s CEO and requires all members of the Board to receive a copy of the letter, as well as sign and return the acknowledgement form to the BOT within 15 days from the date of the Board meeting. The banks are required to report remedial plan progress to the BOT within 30 days from the issuance date of the BOT letter. After that, supervisors will follow up with the banks until concerns are addressed. The scope of offsite and onsite activities will include follow-up of issues. For significant control weaknesses, the banks may be required to provide quarterly status updates to the BOT. |
| EC2 | The supervisor has available34 an appropriate range of supervisory tools for use when, in the supervisor’s judgment, a bank is not complying with laws, regulations or supervisory actions, is engaged in unsafe or unsound practices or in activities that could pose risks to the bank or the banking system, or when the interests of depositors are otherwise threatened. |
| Description and findings re EC2 | The BOT has well-developed operational policies and guidance for the application of enforcement to ensure bank implementation of preventive and corrective orders from BOT. The internal operating guidance is outlined in the Guideline for Enforcement of Prompt Preventive Action and Prompt Corrective Action and other internal documents. FIBA establishes the detailed legal framework supporting the BOT enforcement program. The BOT may pursue corrective measures when banks:
On an ongoing basis, the BOT monitors key indicators and assesses the banks’ financial position, performance and various aspects of risks, for instance, capital adequacy, earnings, liquidity, asset quality, as well as the effectiveness of the Board and senior management oversight and operational management. Where there is a sign of weakness, concerning regulatory ratios (capital, liquidity, asset quality) declining below warning triggers, but before breaching regulatory thresholds, the BOT will require the bank to promptly take remedial actions, for instance
Where it is found that a bank, its director, manager or person with power of management violates, or fails to act in accordance with the provisions of FIBA, or the prescriptions or notifications issued, or the conditions prescribed in the license (Section 89 of FIBA), the BOT has the power and tools to:
Prompt Corrective Action (PCA) Where it is found that a bank capital fund is lower than the required level (Section 95–97 of FIBA), the BOT has the power and tools to:
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| EC3 | The supervisor has the power to act where a bank falls below established regulatory threshold requirements, including prescribed regulatory ratios or measurements. The supervisor also has the power to intervene at an early stage to require a bank to act to prevent it from reaching its regulatory threshold requirements. The supervisor has a range of options to address such scenarios. |
| Description and findings re EC3 | BOT has the power and tools to act where a bank falls below established regulatory thresholds and to intervene at an early stage to prevent it from breaching its regulatory threshold requirements under PPA and PCA. In addition, the BOT has the power to impose penalties (imprisonment and financial penalties) on the bank and/or the persons concerned. |
| EC4 | The supervisor has available a broad range of possible measures to address, at an early stage, such scenarios as described in essential criterion 2 above. These measures include the ability to require a bank to take timely corrective action or to impose sanctions expeditiously. In practice, the range of measures is applied in accordance with the gravity of a situation. The supervisor provides clear prudential objectives or sets out the actions to be taken, which may include restricting the current activities of the bank, imposing more stringent prudential limits and requirements, withholding approval of new activities or acquisitions, restricting or suspending payments to shareholders or share repurchases, restricting asset transfers, barring individuals from the banking sector, replacing or restricting the powers of managers, Board members or controlling owners, facilitating a takeover by or merger with a healthier institution, providing for the interim management of the bank, and revoking or recommending the revocation of the banking license. |
| Description and findings re EC4 | The BOT has available a broad range of measures, which can be applied to address situations at an early stage and in accordance with the gravity of a situation. Prudential objectives or the actions to be taken are set out in the PPA/PCA manuals and, for PCA, in FIBA, for which the BOT has discretion in adopting those measures. |
| EC5 | The supervisor applies sanctions not only to the bank but, when and if necessary, also to management and/or the Board, or individuals therein. |
| Description and findings re EC5 | The BOT applies sanctions not only to banks, but also to the Board and management as well as any person involved, when they fail to take all reasonable steps to ensure compliance with laws and regulations or do not properly perform their duties for the best interest of the bank. Where a bank or a director or an executive officer of the bank fails to comply with FIBA or regulations, the BOT has the power to issue a written warning to the bank or persons concerned, requiring them to refrain from the act in violation of the law or order a removal of any or all directors, managers or persons with power of management (Section 89 of FIBA) In addition, a director or manager of a bank shall be fined or imprisoned if he/she fails to take all reasonable steps to ensure the bank’s compliance with FIBA and regulations or does not properly perform their duties for the best interest of the bank (Section 139–147 of the FIBA). For example, the BOT won a lawsuit against members of senior management of a bank for questionably approving a credit extension to a poorly performing company, that later became nonperforming. In addition, an external auditor, appraiser, or specialist who furnish any false or misleading information or document to the BOT shall be fined or imprisoned (Section 148 of FIBA). Individuals causing, helping or facilitating wrongdoing by the bank’s director, executive officer, external auditor, appraiser, or specialist shall be subject to the punishment provided for such offense (Section 149–150 of FIBA). |
| EC6 | The supervisor has the power to take corrective actions, including ring-fencing of the bank from the actions of parent companies, subsidiaries, parallel-owned banking structures and other related entities in matters that could impair the safety and soundness of the bank or the banking system. |
| Description and findings re EC6 | The FIBA and the BOT Act do not stipulate ring-fencing measures of assets of the local branch specifically to secure the interests of creditors in Thailand. To secure their local operations and ensure stability of their business, Section 32 of the FIBA provides a minimum asset maintenance requirement in place for the local branch whose maintained assets are considered as its capital funds. Currently, foreign banks’ branches are always required to maintain total capital as a ratio of risk-weighted assets at 8.5 percent. The BOT may order a bank to restrict its transactions with affiliated companies and/or may prohibit the bank from making payments in cash, asset and/or other forms, that are not normal remunerations, to the bank’s shareholders or persons with management power, if this action will cause the bank’s capital to be lower than the required level (Section 94 of FIBA). The banks cannot reduce capital without permission of the BOT (Section 80(1) of FIBA). For example, foreign banks, after the global financial crisis, were required to conduct liquidity assessments and stress testing. Branches identified as having a low level of liquid assets were required to retain their profits within Thailand. Moreover, where it is found that the condition or operation of a bank may cause damage to the public interest, the BOT can order the bank to rectify the condition or operation, order a prohibition of an activity that violates the law, order the bank to suspend its business operation entirely or partially, or place the bank under control to contain and resolve the problems (Section 90 of FIBA). |
| EC7 | The supervisor cooperates and collaborates with relevant authorities in deciding when and how to effect the orderly resolution of a problem bank situation (which could include closure, or assisting in restructuring, or merger with a stronger institution). |
| Description and findings re EC7 | The BOT cooperates with relevant authorities in deciding when and how to provide liquidity support or effect the orderly resolution of a problem bank through the FIPC, whose members include the BOT governor and heads of the SEC, OIC, and the FPO of the MOF. The BOT has power to take actions as follows. When a bank faces a serious liquidity problem When a bank faces a serious liquidity problem, that may impact safety and soundness of the bank and/or potentially affect economic stability and financial system soundness, the BOT may provide liquidity support for a bank according to Section 41(1) and 42 of the BOT Act (BOT internal frameworks, guidelines and operational procedures for liquidity support provision). When a bank is insolvent and considered non-systemic. When a non-systemic bank becomes insolvent the BOT may order the bank to (i) rectify its condition or operation; (ii) write-down/increase its capital or both of them; (iii) suspend its business operation entirely or partially for a temporary period; (iv) order the bank to remove any or all of its directors, managers and appoint replacements as appropriate; and (v) order an intervention or require the bank to close its operation, propose revoking the license to the MOF and coordinate with the Deposit Protection Agency (DPA) to pay back depositors. (Section 111 of FIBA). When a bank is insolvent and considered systemic. When a systemic bank becomes or is likely to become insolvent, which could endanger financial stability, the BOT, in collaboration with FIDF and other agencies including the SEC and OIC where relevant, takes appropriate actions, which include assisting in restructuring, asset sale, according to the bank resolution framework to ensure timely and orderly resolution of such distressed bank (Section 43/1 of the BOT Act) As the transitional provisions of the BOT Act that provided for resolution responsibilities of the FIDF lapsed in 2012, the BOT Act was amended in 2018 to put in place a bank resolution framework to deal with distressed banks whose failure may have systemic impact and endanger financial stability. This reform aims to ensure that problem banks would be dealt with in a timely and orderly manner to minimize costs to the public, while maintaining checks-and-balances in the decision-making process and engaging relevant authorities for appropriate support in resolution. In the event of crises, under the amended BOT Act, the BOT upon agreement of the FIPC, proposes resolution schemes to the MOF and the Cabinet for approval. Once the schemes are approved, the FIDF is tasked and empowered to take actions in accordance with the schemes. For effectiveness and flexibility, the FIDF’s powers under the amended BOT Act include provision of loans and other forms of financial assistance, share-purchases as well as other actions necessary to carry out the Cabinet-approved schemes. The BOT has also undertaken contingency planning and developed a crisis management handbook, setting out decision-making process and responsibilities of relevant parties to be used as a guide in handling banks in times of stress to facilitate timely and effective response. As mentioned in CP8 EC6, the BOT requires banks in Thailand to submit recovery plans and plans to develop resolution plans. Such plans will ensure that banks and authorities are prepared in advance for times of stress and that appropriate actions are promptly taken if triggered. In case of cross-border banking groups, the BOT coordinates and collaborates with foreign authorities when the banks’ operations in Thailand are significant, such as sharing information via various means and forum, developing a group resolution plan. |
| Additional criteria | |
| AC1 | Laws or regulations guard against the supervisor unduly delaying appropriate corrective actions. |
| Description and findings re AC1 | Chapter 5 of FIBA sets guidelines, procedures and timeframes for the BOT to implement corrective measures in a timely and appropriate manner to prevent the BOT from unduly delaying appropriate corrective actions. For example,
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| AC2 | When taking formal corrective action in relation to a bank, the supervisor informs the supervisor of non-bank related financial entities of its actions and, where appropriate, coordinates its actions with them. |
| Description and findings re AC2 | In supervising banks and banking groups, the BOT coordinates with other relevant supervisory authorities via regular forum, contacts and exchange of information and points of concern. Recently, the BOT jointly conducted thematic examination and coordinated actions with the SEC and OIC to enhance market conduct in the banking system. At the policy level, the BOT coordinates with other supervisory authorities through the Financial Institution Policy Committee (FIPC), which consists of the BOT, the SEC, the OIC and the MOF. Any liquidity assistance to systemically important banks also needs to be approved by the FIPC. |
| Assessment re principle 11 | Largely Compliant |
| Comments | The BOT has well-developed operational policies and guidance for the application of enforcement to ensure bank implementation of preventive and corrective orders from BOT. The internal operating guidance is outlined in the Guideline for Enforcement of Prompt Preventive Action and Prompt Corrective Action and other internal documents. FIBA establishes the detailed legal framework supporting the BOT enforcement program. Chapter 5 of FIBA provides the BOT with a broad range of possible measures to address safety and soundness issues at an early stage. The BOT has implemented an internal operating guideline for the application of the measures outlined in Chapter 5. However, as currently structured under the Guideline for PPA and PCA, implementation of Chapter 5 corrective action by BOT is linked to “Weak” banks thus not initiating until the bank is exhibiting significant weaknesses. Chapter 5 does not set Weak bank classification as a threshold. The Guideline should be amended to expand on the application of corrective measures in Chapter and clarify that Weak bank status is just one of the benchmarks. The Guideline also links corrective action to FIBA section 92, and bank conditions that may “cause damage to the public interest”. Section 92, which is in Chapter 5 provides an expansive list of circumstances that may cause damage to public interest and requiring notification to MOF if corrective action applied. Notifying MOF may be more appropriate for actions involving banks with a composite rating of “5” or systemically important banks. In discussing this CP, the BOT representatives confirmed that most of the actions listed under the Guideline could be applied at earlier stages and independently of the process described in the Guideline and FIBA, and without MOF notification. In conducting its supervision and requiring banks to correct deficiencies, the BOT has not had to resort to PPA measures. Banks promptly respond to BOT recommendations (Orders). However, it is recommended that FIBA, the Guideline and actual practices be aligned. Amending the Guideline to reflect ability of the BOT to exercize flexibility in pursuing formal corrective actions at earlier stages of bank condition, increasing implementation triggers and medium-term amending FIBA to narrow causing public damage definition to parallel possible bank resolution cases. Recommendations:
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| Principle 12 | Consolidated supervision. An essential element of banking supervision is that the supervisor supervises the banking group on a consolidated basis, adequately monitoring and, as appropriate, applying prudential standards to all aspects of the business conducted by the banking group worldwide.35 |
| Essential criteria | |
| EC1 | The supervisor understands the overall structure of the banking group and is familiar with all the material activities (including non-banking activities) conducted by entities in the wider group, both domestic and cross-border. The supervisor understands and assesses how group-wide risks are managed and takes action when risks arising from the banking group and other entities in the wider group, in particular contagion and reputation risks, may jeopardize the safety and soundness of the bank and the banking system. |
| Description and findings re EC1 | The BOT supervises locally-incorporated banks on both solo and consolidated basis, inclusive of all domestic and cross-border operations and all material activities undertaken by the parent company and its subsidiaries, such as banking, securities, insurance, asset management, and supporting businesses. Under consolidated supervision, the BOT reviews the group’s structure, governance (including fit & proper assessments of directors and executives), risk management, capital, and scope of business. (1) The BOT will ensure that establishment of a group and changes in organizational structure, major shareholders, directors, and authorized management obtains prior approval from the BOT, as well as ensure that the banks’ scope of business and their financial group include only financial businesses or businesses that provide services that support the operations of the banks. (2) Supervisors monitor and examine both, significant domestic and cross-border subsidiaries, on an ongoing basis and remain informed to assess the structure and risks of the financial group proficiently. Action will be taken, If the BOT finds any significant issue that may affect safety and soundness of the banks. Establishment or Significant Change to the Group Establishment of the financial group or any changes to the group must obtain prior approval from the BOT. On this, the BOT will consider that the group’s operational structure will not hinder supervision by both the BOT and other relevant regulatory authorities, risk management of the financial group, and consumer protection. In granting approval, the BOT will stipulate various conditions for banks to complete to ensure that the banks can manage their financial group properly. This includes submitting information on the group’s business structure and scope of business from the start and ongoing monitoring tools and systems. BOT stipulates the scope of financial institutions’ business operations as well as affiliated companies within the financial group to include only financial businesses and other supporting businesses. This will enable appropriate assessment of potential impact on the financial group, whether it is from the financial institutions or affiliates within the group to adequately protect any negative impact on the financial system. (BOT Notification No. FPG. 5/2560, 8/2561, 9/2561, 8/2560 and 9/2560) Ongoing supervision The BOT supervises the financial group on an ongoing basis and both solo and group wide operations (including cross-border affiliates) by assessing significance of each company to the financial group to determine the appropriate level of supervision by considering both quantitative and qualitative factors which may have significant risk impact on financial position, capital adequacy or reputation of the financial group such as asset size and quality, loans exposure, revenues, market share, risk management, internal control, comments from internal/external auditor or other regulators, etc. If the business is significant to the group, it will be considered as a SA for which supervisors will:
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| EC2 | The supervisor imposes prudential standards and collects and analyses financial and other information on a consolidated basis for the banking group, covering areas such as capital adequacy, liquidity, large exposures, exposures to related parties, lending limits and group structure. |
| Description and findings re EC2 | The BOT imposes prudential standards on a consolidated basis for the banking group and collects and analyses financial and other information of the banking group on an ongoing basis as follows: Prudential standards The BOT has issued guidelines for supervision of banking groups. The oversight includes both qualitative and quantitative requirements on the structure of the banking group, scope of business entities within the group, capital adequacy requirement, risk management including credit risk management (e.g., investment limit, exposure to related parties such as intra-group transaction, related lending and single lending limit), market risk and operational risk management, as well as group’s reporting and auditing (The BOT Notification No. FPG. 5/2560, 8/2561, 9/2561, 8/2560 and 9/2560). Data Collection and Analysis As part of ongoing supervision, BOT collects and analyses both financial and non-financial information on a consolidated basis to assess whether the financial group is managed with proper scope, efficient internal controls and risk management as follows:
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| EC3 | The supervisor reviews whether the oversight of a bank’s foreign operations by management (of the parent bank or head office and, where relevant, the holding company) is adequate having regard to their risk profile and systemic importance and there is no hindrance in host countries for the parent bank to have access to all the material information from their foreign branches and subsidiaries. The supervisor also determines that banks’ policies and processes require the local management of any cross-border operations to have the necessary expertise to manage those operations in a safe and sound manner, and in compliance with supervisory and regulatory requirements. The home supervisor takes into account the effectiveness of supervision conducted in the host countries in which its banks have material operations. |
| Description and findings re EC3 | On consolidated supervision of the banks’ foreign operations, the BOT requires that any establishment of a cross-border branch or subsidiary requires prior BOT approval to ensure that the banks can oversee their cross-border operations effectively. As mentioned in EC1, the BOT requires that banks understand and recognize risks of the financial group and have a recruiting process to select the appropriate executives. Moreover, as part of an ongoing monitoring process, the BOT evaluates the oversight of banks’ foreign operations, adequacy and effectiveness of the banks’ policy and procedures, and determines whether local management can manage foreign operations in a safe and sound manner, taking into consideration the results and observations of the host supervisors in the assessment. In granting approval to establish cross-border operations, the BOT will stipulate various conditions to ensure that the banks can sufficiently access information of the branch or subsidiary in that country, have a process for oversight and monitoring of overseas operations as well as overall risk management, so that the banks’ overseas operations do not negative impact on the banks. For example, the banks are required to notify in writing that their subsidiary companies (including those in other country) agree to join the financial group and comply with the consolidated supervision guidelines. The BOT specifies that banks’ staff must be appointed to inspect the business and assets of their foreign subsidiary at least once every two years and submit a copy of the internal audit report to the BOT, and the banks must ensure that the BOT is able to conduct onsite examinations at the banks’ overseas subsidiary. In addition, the BOT requires that banks recruit qualified persons to manage their foreign affiliates. To ensure safe and sound cross-border operations, the banks must submit examination reports, letters of notifications/recommendations from host supervisors, as well as the plans to improve or address any issue of supervisory concerns. As part of ongoing supervision, the BOT supervisors will evaluate appropriateness of the banks’ oversight of their cross-border operations both at the head office and cross-border affiliate level with respect to policy, governance structure, control function, staff, process and system. On this, the BOT assesses:
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| EC4 | The home supervisor visits the foreign offices periodically, the location and frequency being determined by the risk profile and systemic importance of the foreign operation. The supervisor meets the host supervisors during these visits. The supervisor has a policy for assessing whether it needs to conduct onsite examinations of a bank’s foreign operations, or require additional reporting, and has the power and resources to take those steps as and when appropriate. |
| Description and findings re EC4 | The BOT conducts ongoing supervision of the financial group, including examining the banks’ significant affiliates abroad regularly. In supervising the banks’ foreign operations, there are meetings with the host supervisors during the visits. The BOT allocates budget and supervisors for conducting onsite examinations of foreign affiliates, depending on the level of risk and significance of operations to the financial group and the bank. Specifically:
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| EC5 | The supervisor reviews the main activities of parent companies, and of companies affiliated with the parent companies, that have a material impact on the safety and soundness of the bank and the banking group, and takes appropriate supervisory action. |
| Description and findings re EC5 | The BOT reviews the main activities of parent companies, subsidiaries, and affiliated companies that may affect the safety & soundness of the banks and the financial group as part of the approval process for establishment of a financial group and for expansion of business scope of the group, as well as ongoing supervision. Appropriate supervisory action will be taken as deemed necessary. The BOT supervises banks on a consolidated basis. Establishment of the financial group must have prior approval from the BOT. The BOT requires the business scope of the group and the companies within the group to be limited to financial or supporting businesses. As part of the approval process, the BOT evaluates the main activities of parent companies, subsidiaries, and affiliates, and their interconnectedness as well as the impact on safety & soundness of the banks and the financial group. Moreover, the BOT requires the parent companies’ role in setting business policies, risk management policies, and controls and overseeing the financial group to comply with the banks’ internal policies and the BOT regulations. Changes that significantly increase the banks’ risk, particularly, those with possible impact on the financial position and reputation of the financial group, the BOT will require that the parent companies report such changes to the BOT. The BOT supervisors review organizational structure and scope of business of the financial group, specifically, significant entities within the group. Moreover, the BOT supervisors regularly monitor and review main activities of major entities in the financial group, as well as assess appropriateness and adequacy of their risk management systems. If supervisors find that risks of the financial group are not properly managed, the BOT may require the group to maintain additional provisions or capital above the minimum requirement, take remedial actions, or refrain from any activities. |
| EC6 | The supervisor limits the range of activities the consolidated group may conduct and the locations in which activities can be conducted (including the closing of foreign offices) if it determines that:
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| Description and findings re EC6 | The BOT evaluates risks of the financial group and prescribes limits on the range of activities of the consolidated group, if the BOT views that there are risks to safety and soundness of the banks and the financial group or if there is insufficient or ineffective oversight as follows:
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| EC7 | In addition to supervising on a consolidated basis, the responsible supervisor supervises individual banks in the group. The responsible supervisor supervises each bank on a standalone basis and understands its relationship with other members of the group.36 |
| Description and findings re EC7 | The BOT regulates and supervises banks both on a stand-alone basis and on a consolidated basis. During ongoing supervision, the BOT monitors and assesses risks of the banks both on a solo basis (each bank on a stand-alone basis) and consolidated basis. Based on the information obtained from the banks both on a solo and a consolidated basis, including intra-group transactions, the BOT supervisors understand the banks’ relationship with other members of the group, can assess risks that other members of the group may pose to the banks, and check whether intragroup transactions of the banks follow the regulations. Furthermore, the BOT supervisors review and assess the banks’ policy and process concerning intra-group transactions to ensure that the risks and conflict of interests from such transactions are properly managed. |
| Additional criteria | |
| AC1 | For countries which allow corporate ownership of banks, the supervisor has the power to establish and enforce fit and proper standards for owners and senior management of parent companies. |
| Description and findings re AC1 | The BOT issues regulations governing shareholders and authorized persons of the banks’ parent company by Section 55 of FIBA, for which:
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| Assessment of Principle 12 | Compliant |
| Comments | The BOT supervises FBG which are headed by banks, and for the three that are headed by holding companies, BOT can request all information required for proper supervision and perform fit-and-proper tests on significant shareholders, directors and management. Changes to the FBG structure must receive BOT approval. Review of reports and discussions with staff revealed full familiarity with ownership, activities, and condition of the groups. |
| Principle 13 | Home-host relationships. Home and host supervisors of cross-border banking groups share information and cooperate for effective supervision of the group and group entities, and effective handling of crisis situations. Supervisors require the local operations of foreign banks to be conducted to the same standards as those required of domestic banks. |
| Essential criteria | |
| EC1 | The home supervisor establishes bank-specific supervisory colleges for banking groups with material cross-border operations to enhance its effective oversight, taking into account the risk profile and systemic importance of the banking group and the corresponding needs of its supervisors. In its broadest sense, the host supervisor who has a relevant subsidiary or a significant branch in its jurisdiction and who, therefore, has a shared interest in the effective supervisory oversight of the banking group, is included in the college. The structure of the college reflects the nature of the banking group and the needs of its supervisors. |
| Description and findings re EC1 | Currently, Thai banks’ overseas operations are not yet significant to their overall business. Most of the banks have overseas branches or subsidiaries to provide banking services for their clients. The BOT cooperates with supervisors from various countries and organizes bank-specific supervisory colleges for Thai banks which are systemically important and have material cross-border operations on a regular basis. The BOT invites host supervisors of overseas branches or subsidiaries of Thai banks, to exchange information and engage in discussions, to improve the effectiveness of the banking groups’ supervision. In organizing supervisory colleges, the BOT uses the BCBS’s good practice principles on supervisory colleges as a benchmark, and periodically reviews the college membership. Key objectives are to help the BOT supervisors to develop better understanding of the banking group’s risk profile and provide a forum for home and host supervisors to share their risk assessments and supervisory concerns of local operations of the banking group in their respective jurisdictions. There is also a session for senior management of the banking group to provide an overview of the group’s business strategies, risk profile, and risk management. |
| EC2 | Home and host supervisors share appropriate information on a timely basis in line with their respective roles and responsibilities, both bilaterally and through colleges. This includes information both on the material risks and risk management practices of the banking group37 and on the supervisors’ assessments of the safety and soundness of the relevant entity under their jurisdiction. Informal or formal arrangements (such as memoranda of understanding) are in place to enable the exchange of confidential information. |
| Description and findings re EC2 | As the home supervisor of Thai banks and host supervisor of foreign banks’ branches and subsidiaries in Thailand, the BOT shares appropriate information including financial information, material risks, risk management practices, supervisory assessments, points relevant to the banks and their management, and key observations through the following channels:
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| EC3 | Home and host supervisors coordinate and plan supervisory activities or undertake collaborative work if common areas of interest are identified in order to improve the effectiveness and efficiency of supervision of cross-border banking groups. |
| Description and findings re EC3 | The BOT, as home and host supervisor, coordinates supervisory activities with other supervisors to effectively and efficiently supervise cross-border banking groups. As the home supervisor, when planning to conduct onsite visits/ examinations of Thai banks’ overseas operations, the BOT will issue a letter to the host supervisor, outlining the objectives and agenda of the visit. The BOT supervisors will meet with the host supervisor during the visit to notify the examination scope and exchange information on the financial positions and performance of the banks’ overseas operations, as well as the supervisory assessment and key points of concern. The BOT will use this information in examining whether and to what degree the banks have acted on key observations made by the host supervisor. Moreover, the BOT will issue a formal letter to keep the host supervisor updated on important examination results. As the host supervisor, the BOT receives a letter from the home supervisor outlining the objectives and schedule examinations of foreign banks’ branches or subsidiaries in Thailand. The home supervisor will also meet with the BOT during the visit to exchange information on financial positions and performance of the respective foreign banks’ branches or subsidiaries in Thailand, as well as supervisory assessments and key points of concern. Referring to CP3 EC2, the BOT has actively participated in supervisory colleges organized by home supervisors, as well as hosted supervisory colleges and referring to CP13 EC4 and EC6, the BOT regularly conducts supervisory colleges with the host supervisors and the BOT also joins supervisory colleges abroad to exchange information on the financial institution’s risk profile and supervisory concerns and views on financial stability. |
| EC4 | The home supervisor develops an agreed communication strategy with the relevant host supervisors. The scope and nature of the strategy reflects the risk profile and systemic importance of the cross-border operations of the bank or banking group. Home and host supervisors also agree on the communication of views and outcomes of joint activities and college meetings to banks, where appropriate, to ensure consistency of messages on group-wide issues. |
| Description and findings re EC4 | As the home supervisor, the BOT has established a range of communication channels and maintained regular dialogue with relevant host supervisors through emails, phone calls, written mails, bilateral meetings, and supervisory colleges, taking into consideration the risk profile and systemic importance of cross-border operations of the banks or banking groups. The BOT works with the host supervisors to identify the issues to be included in the agenda for discussion among supervisors or with the bank. |
| EC5 | Where appropriate, due to the bank’s risk profile and systemic importance, the home supervisor, working with its national resolution authorities, develops a framework for cross-border crisis cooperation and coordination among the relevant home and host authorities. The relevant authorities share information on crisis preparations from an early stage in a way that does not materially compromise the prospect of a successful resolution and subject to the application of rules on confidentiality. |
| Description and findings re EC5 | The BOT, as the home and host supervisor of banks and banking groups, coordinates and cooperates with relevant home and host authorities with regards to cross-border crisis management and resolution. This includes exchanging information subject to the principles of confidentiality and developing crisis preparation and resolution plans for banks with significant cross-border operations. For the exchange of information, the BOT has concluded bilateral cross-border supervisory coordination arrangements with other supervisory authorities. Additionally, the BOT has signed MOUs with other supervisory authorities from various countries to facilitate the sharing of information and strengthen bilateral collaboration. The MOUs which were recently signed or updated cover information exchanges and collaborations on crisis preparation, management and resolution. Furthermore, for foreign banks / banking groups with significant operations in Thailand, the BOT, as the host supervisor, has signed Cross-border Cooperation Agreements with relevant home and host supervisory and resolution authorities of a Global-Systemically Important Financial Institution due to the potential systemic relevance of its operations in Thailand. Such arrangements provide a basis for coordination in crisis preparations and facilitate communication during business as usual and in times of crises, while recognizing the need for protection of confidentiality of relevant information. For Thai banks with overseas branches or subsidiaries (all of which are not yet of material significance), the BOT regularly organizes supervisory colleges with the host supervisors to exchange information and supervisory concerns, if any. |
| EC6 | Where appropriate, due to the bank’s risk profile and systemic importance, the home supervisor, working with its national resolution authorities and relevant host authorities, develops a group resolution plan. The relevant authorities share any information necessary for the development and maintenance of a credible resolution plan. Supervisors also alert and consult relevant authorities and supervisors (both home and host) promptly when taking any recovery and resolution measures. |
| Description and findings re EC6 | The BOT has required locally-incorporated banks to submit recovery plans on a group-wide basis and provide information necessary for the development of resolution plans. While recently signed MOUs have been updated to cover information exchange and collaboration on crisis preparation, management and resolution, cross border cooperation on recovery and resolution plans is still in its infancy. As the host supervisor, the BOT shares information necessary for the development and maintenance of a credible group resolution plan. The BOT has concluded a Cross-border Cooperation Agreement (COAG) and attends supervisory colleges and Crisis Management Group (CMG) meetings with relevant home and host supervisory and resolution authorities of a Global-Systemically Important Financial Institution due to the potential systemic relevance of its operations in Thailand. Through supervisory colleges and CMG, the BOT is informed of the group’s recovery plan and resolution plan. |
| EC7 | The host supervisor’s national laws or regulations require that the cross-border operations of foreign banks are subject to prudential, inspection and regulatory reporting requirements similar to those for domestic banks. |
| Description and findings re EC7 | The definition of “financial institution” in FIBA covers banks incorporated in Thailand, subsidiaries of foreign banks, and foreign bank branches. Under FIBA, branches and subsidiaries of foreign banks in Thailand are subject to the same prudential, inspection and regulatory reporting requirements like those for domestic banks. |
| EC8 | The home supervisor is given onsite access to local offices and subsidiaries of a banking group in order to facilitate their assessment of the group’s safety and soundness and compliance with customer due diligence requirements. The home supervisor informs host supervisors of intended visits to local offices and subsidiaries of banking groups. |
| Description and findings re EC8 | As mentioned in EC3, the BOT, as the home supervisor, seeks consent or informs the host supervisors before visiting overseas branches and subsidiaries of Thai banks or banking groups, depending on the host supervisors’ requirements. Normally, the BOT will send a formal letter to the host supervisors to inform the objectives and schedule of onsite visits/examinations. The BOT will also meet with the host supervisors during the visit to notify them the scope of examination and exchange information on financial positions and performance of Thai banks’ overseas operations, supervisory assessment and key points of concern. The BOT, as the host supervisor, allows the home supervisors to access branches or subsidiaries of foreign banks and banking groups in Thailand. Normally, before visiting, the home supervisors will issue a letter to the BOT, outlining the objectives and schedule of the examination of the foreign banks’ branches or subsidiaries in Thailand. The home supervisors will also meet with the BOT during the visit to exchange information on financial positions and performance of foreign banks’ branches and subsidiaries in Thailand, supervisory assessment and key points of concern. |
| EC9 | The host supervisor supervises booking offices in a manner consistent with internationally agreed standards. The supervisor does not permit shell banks or the continued operation of shell banks. |
| Description and findings re EC9 | The BOT does not allow shell banks or booking offices in Thailand. The BOT has a strict bank licensing regime. In reviewing new banking license applications, the BOT assesses the applicant’s business plan to check whether the applicant will conduct real banking business as well as contribute to the Thai economic and financial system. The BOT will ensure that the new banks are subject to effective oversight by their head office or parent bank and relevant home supervisors and their local operations are managed safely and soundly. The BOT stipulates that banks seek approval with regards to appointing directors, managers, authorized persons or advisors in accordance with the BOT Notification No. FPG. 11/2561: Criteria for the Approval of the Appointment of the Financial Institution’s Directors, Managers, Persons with Management Power or Advisors. |
| EC10 | A supervisor that takes consequential action on the basis of information received from another supervisor consults with that supervisor, to the extent possible, before taking such action. |
| Description and findings re EC10 | As mentioned in EC2, the BOT reviews information received from home and host supervisors through various channels and forums to monitor and assess financial positions, performance and overall risk of the banking groups and local operations of foreign banks in Thailand. Additionally, the BOT monitors and assesses whether and to what degree the banks place importance and make improvements according concerns and observations of respective supervisory authorities. If the concerns and observation remain, the BOT will consider conducting further examinations and order the banks to take further remedial action. If a consequential action based on information received from another supervisor is needed, the BOT will consult with that supervisor to the extent possible prior to taking such action. So far, the banks have placed great importance and made improvements according to the observations made by the supervisory authorities. Consequential actions are therefore not needed. |
| Assessment of Principle 13 | Compliant |
| Comments | The assessors reviewed the agenda of the supervisory colleges organized by the BOT and attended by the BOT. As a host supervisor, the BOT has attended four supervisory colleges in 2017 and two in 2018. As a home supervisor, the BOT has organized one supervisory college in 2018 and two in 2016. In view of the insignificance of the foreign operations, this is considered adequate. Also, the assessors discussed the effectiveness and intensity of the supervision of cross border operations with the relevant supervisors and they concluded that these are working effectively. No shortcomings were identified in the current practices. |
| Principle 14 | Corporate governance. The supervisor determines that banks and banking groups have robust corporate governance policies and processes covering, for example, strategic direction, group and organizational structure, control environment, responsibilities of the banks’ Boards and senior management,38 and compensation. These policies and processes are commensurate with the risk profile and systemic importance of the bank. |
| Essential criteria | |
| EC1 | Laws, regulations or the supervisor establish the responsibilities of a bank’s Board and senior management with respect to corporate governance to ensure there is effective control over the bank’s entire business. The supervisor provides guidance to banks and banking groups on expectations for sound corporate governance. |
| Description and findings re EC1 | Section 24, 25 and 55 of FIBA gives the BOT the power to require a financial institution, a holding company as the parent company, and subsidiaries in the solo consolidation to obtain prior approval from the BOT before appointing a director, manager, person with power of management or advisor of a financial institution or a holding company and a person with the highest power of management of subsidiaries in the solo consolidation. Section 41 Clause 3 (3) of FIBA prescribes that where it is necessary for the stability of a financial institution and for examination by the financial institution examiner, the BOT has the power to impose requirements on the financial institution in the area of management and administration. Section 84 of FIBA requires financial institutions to set up various committees, and prescribe the composition, qualifications and powers and duties of such committees. In this respect, the BOT has issued regulations and guidelines to enhance sound corporate governance of financial institutions as follows:
Under the BOT Notification on Corporate Governance of Financial Institutions, the financial institution’s Board is responsible for establishing governance policies that are commensurate to the financial institution’s business profile, its systemic importance and organization structure along with other essential mechanisms that facilitate a well-controlled environment. The Board should (Section 5.3 of the BOT Notification on Corporate Governance of Financial Institutions):
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| EC2 | The supervisor regularly assesses a bank’s corporate governance policies and practices, and their implementation, and determines that the bank has robust corporate governance policies and processes commensurate with its risk profile and systemic importance. The supervisor requires banks and banking groups to correct deficiencies in a timely manner. |
| Description and findings re EC2 | Corporate governance is a key factor in determining financial institutions’ composite rating and a key condition in granting an operating license to the financial institutions.
Recently, the BOT has implemented the behavior & culture (B&C) assessment forms to help assess governance and risk culture of four large financial institutions in the pilot project. On this, the BOT sent the assessment forms to the Board and senior management to respond and conducted interviews to assess the directors and senior management’s awareness of governance and risk culture. |
| EC3 | The supervisor determines that governance structures and processes for nominating and appointing Board members are appropriate for the bank and across the banking group. Board membership includes experienced non-executive members, where appropriate. Commensurate with the risk profile and systemic importance, Board structures include audit, risk oversight and remuneration committees with experienced non-executive members. |
| Description and findings re EC3 | The BOT requires that the governance structures, e.g., composition of the Board and board-level committees and the processes for nominating and appointing the Board members are appropriate for the financial institution and financial business groups, particularly (BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions, BOT Notification No. FPG. 8/2560: Regulations on Risk Supervision of Financial Business Groups and Notification of Capital Market Supervisory Board No. Tor Chor 39/2559: Application for and Approval of Offer for Sale of Newly Issued Shares).
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| EC4 | Board members are suitably qualified, effective and exercise their “duty of care” and “duty of loyalty.”39 |
| Description and findings re EC 4 | The BOT requires that the Board members and senior management of a financial institution (FI), the parent company of the FI’s financial business group and its subsidiaries possess suitable qualifications and capabilities and must not have any of the prohibited characteristics stipulated under Sections 24 (1)–(9) of FIBA and the BOT notifications in three main aspects: honesty, integrity and reputation; competence, capability and experience; and financial soundness. Appointment and re-appointment of directors, managers, persons with power of management or advisors must be approved by the BOT and thus subject to the BOT screening process to ensure that persons with criminal records and inappropriate qualifications will not be appointed as a director, manager, person with power of management and advisor of the financial institution. Financial institutions should ensure that their Board members continue to further enhance their knowledge and skills, e.g., via appropriate training, to effectively perform their oversight duties, and that the Board members’ (i) self-evaluation and (ii) cross-evaluations or third-party evaluation are conducted at least on an annual basis. The Board members shall perform their duties with due care (duty of care) and integrity and honesty (duty of loyalty), as well as in accordance with the laws, regulations and approved policies, in the best interest of the institution. The Board members shall also make an informed and rational decision, as well as devote their time and effort to carry out their duties and responsibilities by questioning and participating in the meetings. The Board members are required to attend the Board’s meeting at least 75 percent of the annual board meetings, unless there are valid and sound reasons not to attend. In this respect, the BOT supervisors assess whether the qualifications of the directors, senior management and persons with power of management are in accordance with laws and regulations. The assessment is conducted through reviewing appointment consideration documents, biographies and documents relevant to the deliberation process, such as proof of educational qualifications, guarantees of status as a performing borrower from financial institutions or credit companies, and through checking the director information forms and work experience of the directors, senior management, and persons with power of management for suitability. After the directors, senior management and persons with power of management have been appointed, the BOT will assess their performance and suitability from internal and external sources through:
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| EC5 | The supervisor determines that the bank’s Board approves and oversees implementation of the bank’s strategic direction, risk appetite40 and strategy, and related policies, establishes and communicates corporate culture and values (e.g., through a code of conduct), and establishes conflicts of interest policies and a strong control environment. |
| Description and findings re EC5 | The BOT requires financial institution’s Board to have roles, duties, and responsibilities to (The BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions):
If there are any concerns regarding the bank’s governance, the BOT supervisors will raise the concerns to the bank’s senior management and, where necessary, to the Board/audit committee and will require appropriate remedial actions. |
| EC6 | The supervisor determines that the bank’s Board, except where required otherwise by laws or regulations, has established fit and proper standards in selecting senior management, maintains plans for succession, and actively and critically oversees senior management’s execution of Board strategies, including monitoring senior management’s performance against standards established for them. |
| Description and findings re EC6 | The BOT requires that the Board and/or the Nomination Committee is responsible for formulating policies, guidelines, and processes for selecting candidates to be board members and senior management (Please refer to EC3), who must possess suitable qualifications and capabilities and must not have any of the prohibited characteristics (Please refer to EC4). The Board is also responsible for overseeing the management to put the approved policies into practice, establish appropriate procedure to risk culture and ethics, ensuring that persons responsible for management have appropriate skills, experiences and knowledge to do so, as well as satisfying fit and proper requirements and making sure that adequate succession plan for senior management is in place to promote smooth transition. The Board and/or delegated board-level committees is responsible for establishing guidelines to evaluate the senior management’s performance and determining their compensation, based on their roles and responsibilities as well as their contributions to the long-term goal of business sustainability (Please refer to EC1). As part of ongoing supervision, the BOT supervisors assess whether:
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| EC7 | The supervisor determines that the bank’s Board actively oversees the design and operation of the bank’s and banking group’s compensation system, and that it has appropriate incentives, which are aligned with prudent risk taking. The compensation system, and related performance standards, are consistent with long-term objectives and financial soundness of the bank and is rectified if there are deficiencies. |
| Description and findings re EC7 | The BOT requires that financial institution’s Board (and/or the board-level Remuneration Committee) establishes clearly defined policies and guidelines for determining compensation of the director and senior management, taking into consideration their roles and responsibilities, how well risks are managed, as well as their contributions to the financial soundness of financial institution in the long-run. The Board shall oversee the financial institution to have appropriate compensation policies to attract and retain qualified persons and motivate them to perform their duties with integrity. In particular, the compensation system shall not be mainly based on short-term profits, i.e., not giving director, senior management, and staff the wrong incentives to excessively take risks for short-term profits/performance at the expense of long-term stability. The revised BOT Notifications No. FPG 10/2561: Corporate Governance of Financial Institutions and The BOT Notifications No. FPG 8/2560: Regulations on Risk Supervision of Financial Business Groups determine that the financial institution may use compensation tools/ schemes, such as deferred variable pay, malus and equity-linked deferred bonus, to ensure that the compensation structure reflects the roles and responsibilities of each function, long-term risk profile and future outcomes. The financial institution shall also monitor and assess the effectiveness of its compensation structure to ensure that the compensation scheme supports financial institution’s operation under the sound risk governance framework. As part of ongoing supervision, the BOT supervisors assess:
(2) not create incentives for excessive risk-taking behaviors and reflect the risk profile and risk outcomes; and (3) be sensitive to the time horizon of the risks exposed, e.g., aligning variable parts of compensation with the term risks or using malus if such performance creates excessive risk for the financial institution. The assessment is conducted through reviewing the compensation policy and meeting minutes of the Board and Remuneration Committee.
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| EC8 | The supervisor determines that the bank’s Board and senior management know and understand the bank’s and banking group’s operational structure and its risks, including those arising from the use of structures that impede transparency (e.g., special-purpose or related structures). The supervisor determines that risks are effectively managed and mitigated, where appropriate. |
| Description and findings re EC8 | The BOT requires that the financial business group establishes risk management policies for the group and intra-group transaction policies. Such policies and any changes in the group’s operational structure must be approved by the Board of the parent company in order to ensure that the Board of the parent company understands risks of the financial business group and risks that may arise from intra-group transactions. The BOT also requires that banks’ Board oversees the banks to have comprehensive risk management policies, which are approved and regularly reviewed by the Board, as well as oversees the senior management to ensure that risks are effectively managed to be within the risk tolerance level. The banks’ Board must understand the risks that the banks are exposed to as well as the tools that the banks use to manage risks to ensure that the bank’s risk management systems are efficient and effective (The BOT Notification No. FPG 8/2560: Regulations on Risk Supervision of Financial Business Groups and BOT Notification No. FPG 10/2561: Corporate Governance of Financial Institutions). As part of ongoing supervision, the BOT supervisors assess whether the Board and senior management of financial institution understand the financial institution and the financial business group’s structure and associated risks, including those from intra-group transactions. Specifically, the BOT supervisors will examine the information related to approving the structure, meeting minutes and other documents received by the Board and other relevant committees in the financial institution and the financial business group such as Risk Management Committee. The BOT supervisors will check whether the Board and other relevant committees have received sufficient information which is timely and beneficial to decision-making, whether there have been any follow up questions or helpful comments, and whether the Board and senior management have implemented measures to eliminate or mitigate significant risks. |
| EC9 | The supervisor has the power to require changes in the composition of the bank’s Board if it believes that any individuals are not fulfilling their duties related to the satisfaction of these criteria. |
| Description and findings re EC9 | In cases where a financial institution, its director and senior management violate or fail to comply with the provisions of FIBA or prescriptions or notifications issued by virtue of FIBA, including the BOT notifications regarding corporate governance, or the conditions prescribed in the license, the BOT has the power to order the financial institution to remove any or all of the directors and senior management from their offices (Section 89 of FIBA). As part of ongoing supervision, the BOT supervisors will assess the composition of the financial institution’s Board and their performance. If there are any points of concern on their duty performance or the composition is found to be inappropriate such as in terms of the number of independent directors or diversity of the directors’ expertise and experience, the BOT will ask the financial institution to make adjustments to the Board’s composition in order for the Board to oversee the financial institution for the best interests of the shareholders. |
| Additional criteria | |
| AC1 | Laws, regulations or the supervisor require banks to notify the supervisor as soon as they become aware of any material and bona fide information that may negatively affect the fitness and propriety of a bank’s Board member or a member of the senior management. |
| Description and findings re AC1 | The BOT requires the financial institution to notify the BOT as soon as it is aware of any reliable information that may negatively affect suitability and propriety of the director, manager, and person with the power of the management. This requirement is listed in the circular letter to all financial institutions. |
| Assessment of Principle 14 | Compliant |
| Comments | The assessors reviewed several inspection reports, corrective orders, recommendations , and supporting supervisory documents and determined that the BOT comprehensively assesses if financial institutions have robust corporate governance policies and processes that are commensurate with the risk profile and systemic importance of the financial institution. The corpus of regulations, guidelines, and the supervisory manual in corporate governance is comprehensive, enforceable, and in line with international good practice. At the assessment date, the BOT regulation with regard to corporate governance of financial institutions have already been enhanced at solo basis by the newly issued regulation which came into effect since June 2018. For FBG, the enhancement to the governance requirement will be in effect from May 2019 onward. In the meantime, the governance of FBG follows the existing BOT notification no. FPG 8/2560 on supervision of corporate governance of FBG which covers almost all aspects of effective governance. The enhancement to the corporate governance regulation aims to strengthen management systems, transparency, and market discipline by reinforcing the BOT’s expectation of (i) responsibility of the parent company board on oversight of subsidiaries, and (ii) composition of the parent company’s board and subcommittees. The new notification will enhance corporate governance of financial institutions on a consolidated basis with the objective to strengthen oversight of the group’s governance framework, the Board’s annual performance assessment, remuneration structure, management of conflict of interests, and effective control, oversight and audit mechanisms. Moreover, the regulation introduces a performance assessment. Also, the following requirements of the BOT Notification No.FPG. 10/2561: Corporate Governance of Financial Institutions are still subject to transitional and grandfathering measures are not yet enforced at the assessment date.
The pilot on behavior & culture (B&C) assessment in four large financial institutions is at the cutting edge of good practice. To continue to raise awareness of governance and risk culture, the assessors recommend the BOT incorporates regular meetings with independent directors as part of its supervisory process. |
| Principle 15 | Risk management process. The supervisor determines that banks41 have a comprehensive risk management process (including effective Board and senior management oversight) to identify, measure, evaluate, monitor, report and control or mitigate42 all material risks on a timely basis and to assess the adequacy of their capital and liquidity in relation to their risk profile and market and macroeconomic conditions. This extends to development and review of contingency arrangements (including robust and credible recovery plans where warranted) that consider the specific circumstances of the bank. The risk management process is commensurate with the risk profile and systemic importance of the bank.43 |
| Essential criteria | |
| EC1 | The supervisor determines that banks have appropriate risk management strategies that have been approved by the banks’ Boards and that the Boards set a suitable risk appetite to define the level of risk the banks are willing to assume or tolerate. The supervisor also determines that the Board ensures that:
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| Description and findings re EC1 | The BOT requires that the financial institution’s Board establishes or approves the financial institution’s effective risk governance framework which covers risk appetite, risk management policies and strategies, as well as risk culture. In this regard, the BOT expects the financial institution’s Board to: (a) Encourage sound risk culture and ensure that it is communicated throughout the entire financial institution so that all relevant parties understand risk related matters and their respective roles. (b) Ensure that risk-taking policies and processes are consistent with its comprehensive risk management policy and strategy as well as its established risk appetite. (c) Recognize and understand limitations and uncertainties of output from the models used by the financial institution as well as its inherent risks. (d) Ensure that risk limits are in line with risk appetite, risk profile, capital and liquidity strength of the financial institution. (e) Ensure that risk management framework is properly implemented and controlled by senior management in order to make sure that risks are within the approved risk appetite and limits. Recently, the BOT has revised its Notification on Corporate Governance of Financial Institutions to enhance the Board’ responsibilities particularly with regard to risk governance framework to ensure that the financial institutions have comprehensive risk management system and sound risk culture. (BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions) The BOT supervisors assess adequacy, appropriateness, and effectiveness of the financial institutions’ risk management policies, strategies, processes, and controls in the following aspects:
Moreover, when conducting onsite examination, the BOT supervisors have a comprehensive process including reviewing various documents and reports submitted by financial institutions, performing a walk-through test and transaction testing as well as interviewing relevant staffs to evaluate the effectiveness of the policies, strategies, risk management and control process. If there is any concern, the BOT supervisors will instruct the financial institutions to make correction. Recently, the BOT has implemented the behavior & culture (B&C) assessment forms to help assess governance and risk culture of four large financial institutions in the pilot project. On this, the BOT sent the assessment forms to the Board and senior management to respond and conducted interviews in order to assess the directors and senior management’s awareness of governance and risk culture, and assess whether they consider these issues as important. |
| EC2 | The supervisor requires banks to have comprehensive risk management policies and processes to identify, measure, evaluate, monitor, report and control or mitigate all material risks. The supervisor determines that these processes are adequate:
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| Description and findings re EC2 | The BOT requires financial institutions to have comprehensive risk management policies and processes to identify, measure, evaluate, monitor, report and control or mitigate all material risk types. These processes shall be in line with its risk profile and systemic importance and consider risks that arising from macroeconomic environment. (BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions) The BOT supervisors determine and assesses that these policies and processes are adequate, for example, whether they:
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| EC3 | The supervisor determines that risk management strategies, policies, processes and limits are:
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| Description and findings re EC3 | As mentioned in EC1, the BOT requires that financial institution’s risk management strategies, policies, processes and limits are properly documented, communicated throughout the organization, reviewed and adjusted in response to the changes of risk appetite, risk profiles, capital and liquidity strength, and macroeconomic conditions at least once a year or when significant changes occur. Moreover, the Board shall regularly monitor and receive accurate and timely information regarding financial institution’s risk level, efficiency of risk management, risk culture implementation progress as well as important factors and material issues of the financial institution by relevant committees and senior management (BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions). On an ongoing basis, the BOT supervisors assess whether:
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| EC4 | The supervisor determines that the bank’s Board and senior management obtain sufficient information on, and understand, the nature and level of risk being taken by the bank and how this risk relates to adequate levels of capital and liquidity. The supervisor also determines that the Board and senior management regularly review and understand the implications and limitations (including the risk measurement uncertainties) of the risk management information that they receive. |
| Description and findings re EC4 | The BOT requires that the financial institution’s Board obtains sufficient information from senior management in order to effectively perform its duties, that the Board oversees the financial institutions to have effective information systems for the aggregation and reporting of risk management information including its risk profile (nature and level of risks) in relation to capital and liquidity levels in an accurate, complete and timely manner, and that the Board and senior management regularly review and understand the implications and limitations of, and can effectively use such information to ensure that risks of the financial institution are properly managed and are within the acceptable level (BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions). In this respect, the BOT supervisors assess that:
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| EC5 | The supervisor determines that banks have an appropriate internal process for assessing their overall capital and liquidity adequacy in relation to their risk appetite and risk profile. The supervisor reviews and evaluates banks’ internal capital and liquidity adequacy assessments and strategies. |
| Description and findings re EC5 | The BOT requires financial institutions to have an internal capital and liquidity adequacy assessment processes (BOT Notification No. SVG. 5/2552 Re: Guideline on Supervisory Review of Capital Adequacy (Pillar 2) and BOT Policy Guidelines on Liquidity Risk Management for Financial Institutions) and the financial institution’s Board to oversee such processes and ensure that the financial institutions have adequate levels of capital and liquidity (the BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions). In this respect, the BOT supervisors assess whether banks have adequate and effective policies, strategies and processes for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining adequate capital levels, capturing all material risks faced by the financial institutions by reviewing the financial institutions’ risk management and capital adequacy assessment documents, e.g., the financial institutions’ ICAAP reports submitted to the BOT on an annual basis (which contain information about the financial institutions’ risk assessment, capital assessment, and stress test results proposed to the financial institutions’ Board, as well as capital plan), internal risk management reports, minutes and documents supporting risk management agenda of the Board meetings and other relevant committee meeting. The BOT supervisors also interview relevant persons and perform a walk-through test. Furthermore, the BOT supervisors check whether the financial institutions have adequate and effective policies, strategies, and processes for identifying, measuring, monitoring, managing and controlling liquidity risk under both normal and stressed circumstances, conduct and integrate stress test results into their liquidity risk management, development of contingency plan, and maintenance of adequate liquidity cushion by reviewing the financial institutions’ liquidity risk management and liquidity adequacy assessment documents such as policies and procedures on liquidity risk management including liquidity stress test processes and test results, liquidity contingency plan and result of the plan testing, internal liquidity risk management reports, minutes and documents supporting liquidity risk management agenda of the Board meetings and other relevant committee meetings such as ALCO. In addition, the BOT supervisors conduct onsite examinations to evaluate the effectiveness of the internal capital and liquidity process. If there is any concern, BOT supervisors will instruct the financial institution to make corrections. In case where the financial institutions’ capital or liquidity position is inadequate, the BOT will further examine to determine if the financial institution has comprehensive and effective contingency plans in place and instruct the financial institutions to make improvements when necessary. |
| EC6 | Where banks use models to measure components of risk, the supervisor determines that:
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| Description and findings re EC6 | The BOT requires that the models that financial institutions use to measure risks comply with the BOT minimum requirements, e.g., are widely used and accepted, able to capture and reflect risk in an accurate, reasonable, and reliable manner. In the aspects of inputs, processes and outputs, the financial institution’s Board and senior management are aware of and understand the limitations and constraints of the models, as well as uncertainties and risks relating to the outputs, and the financial institution performs regular and independent validation and testing of the models (BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions and Best Practice for Risk Management Process: Risk Model Validation). In this respect, the BOT supervisors assess that
(2) Process: risk model theories, assumptions, factors, computer programs, and mathematical formulas used in the models, and (3) Output, e.g., comparing outputs from the models with the actual outcome (back testing).
Moreover, the BOT supervisors, together with the BOT model specialist team, assess the accuracy, reliability, validity, and regulatory compliance of financial institutions’ risk models and risk parameters used for: (i) regulatory capital calculation, e.g., internal rating based (IRB) approach for credit risk and internal model for market risk (such as Value at Risk); (ii) calculation of provisioning level for current loan (CL)/ possible impaired loan (PIL), e.g., internal model to estimate PD, LGD, or EL; (iii) stress testing; (iv) other internal models for assessing risk components, such as credit rating, credit scoring models. If there is any concern, the BOT supervisors will instruct the financial institutions to take corrective action. |
| EC7 | The supervisor determines that banks have information systems that are adequate (both under normal circumstances and in periods of stress) for measuring, assessing and reporting on the size, composition and quality of exposures on a bank-wide basis across all risk types, products and counterparties. The supervisor also determines that these reports reflect the bank’s risk profile and capital and liquidity needs and are provided on a timely basis to the bank’s Board and senior management in a form suitable for their use. |
| Description and findings re EC7 | The BOT requires that financial institutions establish adequate, efficient and effective information system for managing and reporting of risk exposures to support comprehensive and effective risk management of the financial institution. These reports shall cover all material risk types and reflect the financial institution’s strategy, risk profile, its systemic importance as well as capital and liquidity need, and shall be provided to financial institution’s Board, relevant sub-committees, senior management, and relevant parties in an appropriate and timely manner (BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions, BOT Notification No. SVG. 5/2552: Guideline on Supervisory Review of Capital Adequacy (Pillar 2) and BOT Policy Guidelines on Liquidity Risk Management for Financial Institutions). In this respect, the BOT supervisors assess that:
(2) Completeness: the information reflects size, composition and quality of exposures on a financial institution-wide basis across all products, all locations, all types of material risks, and all counterparties both under normal circumstances and in periods of stress. (3) Timeliness: information is up to date and available at an appropriate frequency.
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| EC8 | The supervisor determines that banks have adequate policies and processes to ensure that the banks’ Boards and senior management understand the risks inherent in new products,44 material modifications to existing products, and major management initiatives (such as changes in systems, processes, business model and major acquisitions). The supervisor determines that the Boards and senior management are able to monitor and manage these risks on an ongoing basis. The supervisor also determines that the bank’s policies and processes require the undertaking of any major activities of this nature to be approved by their Board or a specific committee of the Board. |
| Description and findings re EC8 | The BOT requires that the Board understand inherent risks of new product development/new transactions, material modifications to existing products and major management initiatives such as changes in systems and major mergers & acquisitions, and that the policies regarding such activities are approved by the Board. The Board and senior management must be able to monitor and ensure that such risks are effectively managed on an ongoing basis (the BOT Notification No. FPG. 10/2561 Corporate Governance of Financial Institutions). The BOT supervisors assess adequacy and effectiveness of the banks’ policies or procedures about new product development/new transactions, material modifications to existing products and major management initiatives to ensure that:
The BOT supervisors also conduct onsite examination to assess whether the operations are in line with the financial institutions’ policies and procedures and evaluate if the financial institutions’ Board and senior management understand and perform their duties by continuously monitoring and managing the risks arising from new products, material modifications to existing products, and major management initiatives. If there is any concern, the BOT supervisors will instruct the financial institution to make correction. |
| EC9 | The supervisor determines that banks have risk management functions covering all material risks with sufficient resources, independence, authority and access to the banks’ Boards to perform their duties effectively. The supervisor determines that their duties are clearly segregated from risk-taking functions in the bank and that they report on risk exposures directly to the Board and senior management. The supervisor also determines that the risk management function is subject to regular review by the internal audit function. |
| Description and findings re EC9 | The BOT requires that financial institutions have control functions including risk management function that are effective and independent from the risk-taking functions. Control functions shall have sufficient resources, authority and stature, competent and experienced personal, to support effective check and balance mechanism within the financial institution. The head of risk management function should have a reporting line to the Board or board-level committees apart from reporting to the CEO. The financial institution’s risk management system and risk management function are subject to regular review by the internal audit function. (the BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions and BOT Policy Statement on Internal Audit) .On this, the BOT supervisors assess that the financial institutions’ risk management function:
Furthermore, the BOT assesses to ensure that composition and qualification of the financial institutions’ risk management committee (RMC) are appropriate and in compliance with the BOT regulations and that RMC performs an effective role in helping the CEO overseeing risk management of the financial institutions by reviewing the RMC Charter, qualification of RMC members, minutes of the Board, risk oversight committee, and RMC meetings, and risk management information reviewed by the RMC as well as interviewing relevant senior management and staff. |
| EC10 | The supervisor requires larger and more complex banks to have a dedicated risk management unit overseen by a Chief Risk Officer (CRO) or equivalent function. If the CRO of a bank is removed from his/her position for any reason, this should be done with the prior approval of the Board and generally should be disclosed publicly. The bank should also discuss the reasons for such removal with its supervisor. |
| Description and findings re EC10 | The BOT requires financial institutions to appoint Chief Risk Officer (CRO) with sufficient stature and seniority within the organization to oversee the financial institution’s risk management functions. Moreover, the appointment, change, and removal of the CRO shall be approved by the financial institution’s Board and the financial institution shall inform the BOT of these changes. In addition, the financial institution shall publicly disclose its organization chart which includes head of risk management function (the BOT Notification No. FPG. 10/2561 Corporate Governance of Financial Institutions). The BOT supervisors assess that:
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| EC11 | The supervisor issues standards related to, in particular, credit risk, market risk, liquidity risk, interest rate risk in the banking book and operational risk. |
| Description and findings re EC11 | The BOT has issued regulations and guidelines for major risk types as follows: Credit risk
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| EC12 | The supervisor requires banks to have appropriate contingency arrangements, as an integral part of their risk management process, to address risks that may materialize and actions to be taken in stress conditions (including those that will pose a serious risk to their viability). If warranted by its risk profile and systemic importance, the contingency arrangements include robust and credible recovery plans that take into account the specific circumstances of the bank. The supervisor, working with resolution authorities as appropriate, assesses the adequacy of banks’ contingency arrangements in the light of their risk profile and systemic importance (including reviewing any recovery plans) and their likely feasibility during periods of stress. The supervisor seeks improvements if deficiencies are identified. |
| Description and findings re EC12 | The BOT requires financial institutions to have clearly written and practical contingency plans, which specify the strategies and actions in times of stress, particularly with regard to capital (capital plan & contingency plan, in case of unexpected events and inability to increase capital as planned), liquidity (contingency funding plan: CFP), business operations (business continuity plan: BCP) (the BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions, the BOT Notification No. SVG. 5/2552: Guideline on Supervisory Review of Capital Adequacy (Pillar 2) and the BOT Policy Guidelines on Liquidity Risk Management for Financial Institutions). In addition, the BOT requires financial institutions to submit recovery plans (BOT Notification No. FPG. 16/2561: Recovery Planning Requirement for Commercial Banks and related Recovery Planning Guideline) and provide essential information for the development of resolution plans to the BOT. As part of recovery plans, financial institutions are required to identify their critical functions, critical shared services as well as the extent of interdependencies within the group. Feasibility of recovery options must be demonstrated, including options to separate or cease operations of certain parts of the business while maintaining operational continuity of critical services. Such information would facilitate resolvability assessments undertaken as part of development of the financial institutions’ resolution plans. The BOT supervisors assess whether financial institutions establish guidelines, including responsible functions, with clear and sufficient details as well as appropriate and feasible duration of operations in their contingency plans (e.g., BCP, capital plan and CFP) and whether the plans:
In addition, the BOT supervisors, in conjunction with the Special Resolution Unit (SRU) and in collaboration with other relevant authorities, assess the adequacy of the financial institutions’ recovery plans, taking into consideration the financial institutions’ risk profile and systemic importance in the following aspects:
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| EC13 | The supervisor requires banks to have forward-looking stress testing programs, commensurate with their risk profile and systemic importance, as an integral part of their risk management process. The supervisor regularly assesses a bank’s stress testing program and determines that it captures material sources of risk and adopts plausible adverse scenarios. The supervisor also determines that the bank integrates the results into its decision-making, risk management processes (including contingency arrangements) and the assessment of its capital and liquidity levels. Where appropriate, the scope of the supervisor’s assessment includes the extent to which the stress testing program:
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| Description and findings re EC13 | The BOT requires financial institutions to have forward-looking stress testing policies and programs, commensurate with their risk profile and systemic importance, and incorporate them into the financial institutions’ decision-making, risk management processes and assessment of the capital and liquidity levels. The Board must approve the stress testing policies and, together with the financial institutions’ senior management, oversee risk management of the financial institutions to ensure that risks are properly managed and within risk tolerance levels and that the financial institutions have adequate capital and liquidity to absorb those risks both in normal circumstances and in times of stress (the BOT Notification No. SVG. 5/2552: Guideline on Supervisory Review of Capital Adequacy (Pillar 2) and the BOT Policy Guidelines on Liquidity Risk Management for Financial Institutions). In this respect, the BOT supervisors check and assess that:
In addition, the BOT requires banks to conduct annual supervisory stress tests to monitor the impact of major risks to Thai banks. The BOT also provides feedback on the stress test results of the overall Thai banking system to Thai banks. |
| EC14 | The supervisor assesses whether banks appropriately account for risks (including liquidity impacts) in their internal pricing, performance measurement and new product approval process for all significant business activities. |
| Description and findings re EC14 | The BOT requires financial institutions to have a sound risk culture and effective risk governance framework, which accounts for risk in their internal pricing, performance measurement, and new product approval processes (the BOT Notification No. FPG. 10/2561Corporate Governance of Financial Institutions and the BOT Policy Guidelines on Liquidity Risk Management for Financial Institutions). The BOT supervisors assess whether financial institutions appropriately incorporate risks in their internal pricing, performance measurement, and new product approval process for all significant business activities by reviewing the financial institutions’ internal pricing approaches/models (e.g., fund transfer pricing (FTP) and risk-adjusted return on capital (RAROC)), key performance indicators (KPIs) of the financial institutions’ senior management, and new product development process (as mentioned in EC8). The BOT supervisors also interview relevant persons to assess whether such procedures account for significant risk factors and have been effectively applied to all significant business activities. |
| Additional criteria | |
| AC1 | The supervisor requires banks to have appropriate policies and processes for assessing other material risks not directly addressed in the subsequent Principles, such as reputational and strategic risks. |
| Description and findings re AC1 | The BOT requires financial institutions to have a sound risk culture and an effective risk governance framework, which considers risks into their internal pricing, performance measurement, and new product approval process (the BOT Notification No. FPG. 10/2561 Corporate Governance of Financial Institutions and the BOT Policy Guidelines on Liquidity Risk Management for Financial Institutions). The BOT supervisors assess whether financial institutions incorporate risks in their internal pricing, performance measurement, and new product approval process for all significant business activities by reviewing the financial institutions’ internal pricing approaches/models (e.g., fund transfer pricing (FTP) and risk-adjusted return on capital (RAROC)), key performance indicators (KPIs) of the financial institutions’ senior management, and new product development process (as mentioned in EC8). The BOT supervisors also interview relevant persons to assess whether such procedures appropriately account for significant risk factors and have been effectively applied to all significant business activities. |
| Assessment of Principle 15 | Compliant |
| Comments | The assessors reviewed examination reports, risk assessments, and supporting supervisory documents in risk management. They found that the BOT supervisors assess the financial institutions’ policies, procedures, and practices in sufficient depth and scope across the risk categories. The assessors recommend that the BOT better articulate its supervisory expectations by publishing best practice guides, for example after thematic reviews or when a range of practice is observed on topics, for example risk management and governance. This will also contribute to the international standing of the BOT as a world class prudential supervisor. |
| Principle 16 | Capital adequacy.45 The supervisor sets prudent and appropriate capital adequacy requirements for banks that reflect the risks undertaken by, and presented by, a bank in the context of the markets and macroeconomic conditions in which it operates. The supervisor defines the components of capital, bearing in mind their ability to absorb losses. At least for internationally active banks, capital requirements are not less than the applicable Basel standards. |
| Essential criteria | |
| EC 1 | Laws, regulations or the supervisor require banks to calculate and consistently observe prescribed capital requirements, including thresholds by reference to which a bank might be subject to supervisory action. Laws, regulations or the supervisor define the qualifying components of capital, ensuring that emphasis is given to those elements of capital permanently available to absorb losses on a going concern basis. |
| Description and findings re EC1 | Section 29 – 32 of FIBA empowers the BOT to require banks (both locally incorporated banks and foreign bank branches) to maintain capital. In addition, the BOT has the power under Section 94–97 of FIBA to order banks to submit a recapitalization plan, intervene and/or suspend operations of a bank if the bank fails to comply with the minimum capital requirement or its capital adequacy ratio falls below a pre-set level. In line with Basel III, the BOT requires locally incorporated banks to maintain Common Equity Tier 1 (CET1) of at least 4.5 percent, Tier 1 capital of at least 6 percent and total capital of at least 8.5 percent of risk-weighted assets at the end of the day both on a solo and consolidated basis (The BOT Notification No. FPG. 12/2555: Regulations on Supervision of Capital for Commercial Banks and the BOT Notification No. FPG. 9/2561: Regulations on Capital Supervision for Financial Business Groups). Foreign banks’ branches are required to have funds from parent companies maintained in the form of qualified assets of which the amounts, types, procedures and conditions are prescribed by the BOT Notification No. FPG. 8/2558: Regulations on Components of Capital for Foreign Bank Branches. These assets are considered as capital of foreign banks’ branches to secure their local operations and ensure stability of their business. Currently, foreign banks’ branches are always required to maintain total capital as a ratio of risk-weighted assets at 8.5 percent. (The BOT Notification No. FPG. 12/2555) Under the BOT Notification No. FPG. 7/2558: Regulations on Components of Capital for Locally Incorporated Banks, the BOT prescribes capital components in line with Basel III to ensure the banks’ capacity to absorb loss both on an ongoing and gone concerns. Capital comprises common equity tier 1 (CET1), Additional tier 1 (AT1), and Tier 2. CET1 primarily comprises common shares and retained earnings. Equity instruments to be included in CET1 must meet a set of criteria including a perpetual nature, meaning the instruments cannot be repaid outside of liquidation (except in the case of buy-back of shares which requires prior approval from the BOT so as to ensure that the banks remain well-capitalized after buy back and have sufficient amount of capital suitable for their risk exposure and business). In any case, banks must not specify the conditions that create an expectation that the instruments will be bought back, redeemed or cancelled. Principal of AT1 instruments is also required to be perpetual and there are no step-ups or other incentives to redeem. To ensure that capital instruments meet all criteria specified in the BOT regulations and can absorb losses on a going-concern basis, inclusion of eligible financial instruments as capital and redemption of capital instrument require prior approval by the BOT. The BOT regularly monitors the adequacy of capital using the data reported monthly from banks through the Data Management System (DMS), focusing on components of capital, risk weighted assets and capital ratios. Those data are utilized as one of the benchmarking tools to compare loss absorbance capacity of selected bank and its peers at least on a quarterly basis. Moreover, the BOT has developed EWI to identify plausible triggers of risk accumulation which could potentially impact banks’ capital adequacy. The BOT has implemented prudential filters to address the changes in fair value measurement of derivatives transactions used for hedging cash flow risk, for accumulated gains or losses occurred from any changes in the banks’ own credit worthiness and for accumulated gains or losses from the alternative approach in accounting of the fair value option. The Thai banking system is very well capitalized; the most recent total capital ratio for D-SIBs stood at 17.57 percent, for non-D-SIBs it is was 19.64 percent and for foreign bank branches it reached 20.57 percent During onsite examination, the BOT supervisors will review and verify the capital calculation and assess capital planning processes and strategies both in the short-run and long-run. |
| EC2 | At least for internationally active banks,46 the definition of capital, the risk coverage, the method of calculation and thresholds for the prescribed requirements are not lower than those established in the applicable Basel standards. |
| Description and findings re EC2 | All locally incorporated banks (including retail bank, foreign bank’s subsidiary) are subject to capital requirement of 8.5 percent (higher than the Basel standards), Tier 1 ratio of 6 percent, Common Equity Tier 1 of 4.5 percent (same as the Basel Standards) and the Basel III buffer requirements. The BOT Notification No. FPG. 12/2555: Regulations on Supervision of Capital for Commercial Banks requires banks to hold two types of capital buffer, namely (i) Conservation buffer; for banks to build up capital buffer outside period of stress which can be drawn down when the banks encounter losses or when an economic crisis occurs. Currently, banks are required to hold a conservation buffer of 2.5 percent; (ii) Countercyclical buffer; for banks to hold capital considering the macrofinancial environment. The countercyclical buffer will be put in place to prevent risk build-up during the time of excessive growth and will be released to accommodate economic activities during economic downturn. Currently, there is no indication of excessive credit growth, therefore, banks are not required to hold countercyclical buffer for now. The BOT may require banks to hold countercyclical buffer in the future as deemed necessary. The BOT Notification No. FPG. 7/2558 stipulates the definition of capital (in line with the Basel III standard) for locally incorporated banks. With respect to risk coverage, the capital requirement under Pillar 1 covers credit risk, market risk and operational risk from all on- and off-balance sheet items. The method of calculating risk-weighted asset for credit risk, market risk and operational risk are prescribed in the BOT Notification No. FPG.15/2555 (credit risk-SA), BOT Notification No. FPG.16/2555 (credit risk-IRB), BOT Notification No. FPG.17/2555 (counterparty credit risk for derivative transactions), BOT Notification No. FPG.18/2555 (the Calculation of Credit Risk-weighted Assets for Failed Trades and Non-Delivery versus Payment (Non-DvP) Transactions), BOT Notification No. FPG. 94/2551 (market risk) and BOT Notification No. FPG.95/2551 (operational risk-BIA and SA) and BOT Notification No. FPG.55/2555 (operational risk- Advanced Measurement Approach (AMA). Calculation of credit risk and operational risk are consistent with the current Basel standards, while the market risk framework is currently based on Basel II standard as none of locally incorporated banks use internal models to calculate capital for market risk exposure and they are not engaged in credit correlation trading or securitization which are the areas of focus of Basel II.5. The new market risk framework under Basel III will be implemented in 2022. The capital charge for Credit Valuation Adjustment risk and capital requirement for exposures to CCP will in effect in 2021 and the new standardized approach to calculate counterparty credit risk exposure (SA-CCR) will be implemented in 2024. Currently, the calculation of counterparty credit risk exposure is in accordance with the BOT Notification No. FPG. 17/2555: Regulations on the Calculation of Counterparty Credit Risk-Weighted Assets for Derivative Transactions, which requires banks to use the current exposure method (CEM) under Basel II. The BOT views that the approach effectively and adequately reflects counterparty credit risk given the current level and complexity of derivative activities of banks in Thailand. Besides, banks are required to comply with the risk management requirements to be able to undertake derivatives business. Specifically, banks can engage in derivatives within the scope specified in the BOT Notification No. FPG.12/2558 (Regulations on derivative transactions), BOT Notification No. FPG. 13/2558 (market derivatives), BOT Notification No. FPG. 14/2558 (credit derivatives), and BOT Notification No. FPG. 15/2558 (structured products), whereby stringent risk management (BOT Notification No. FPG. 16/2558: Regulations on Risk Management for Derivative Transactions) and client suitability analysis (BOT Notification No. FPG. 17/2558: Minimum Requirements on Treatment of Clients for Engaging in Derivative Transactions) are required. |
| EC3 | The supervisor has the power to impose a specific capital charge and/or limits on all material risk exposures, if warranted, including in respect of risks that the supervisor considers not to have been adequately transferred or mitigated through transactions (e.g., securitization transactions)47 entered into by the bank. Both on-balance sheet and off-balance sheet risks are included in the calculation of prescribed capital requirements. |
| Description and findings re EC3 | Section 30 of FIBA gives the BOT power to require banks to maintain additional capital apart from minimum capital ratios set out under Pillar 1 as deemed necessary to absorb potential losses incurred under normal and extreme circumstances. To ensure that banks have a robust risk management system, banks are required to establish Internal Capital Adequacy Assessment Process (ICAAP) to cover all significant risks arising from their business both on- and off-balance sheet, including not only risks set out under Pillar 1 but also Pillar 2 risks such as concentration risk, interest rate risk in banking book, liquidity risk, and strategic risk as described in the BOT Notification No. SVG 5/2552: Guideline on Supervisory Review of Capital Adequacy (Pillar 2). As part of the Pillar 2 framework, all banks are required to submit their annual ICAAP report no later than Q1 of each year. The BOT then reviews and evaluates each bank’s ICAAP against its nature, size and complexity of the business. Any issues arising from the review and evaluation will be raised and discussed with the bank executives or with the bank’s Board as the case may be. The BOT will make comments and suggestion on capital planning assumptions and thresholds that the bank needs to act in accordance with its capital plan. If a bank’s ICAAP does not meet the BOT requirements, for example the severity of stress scenarios or capital plan is not in line with the business plan, a corrective order will be issued and followed up as part of ongoing supervision. During the onsite examination and assessment of risk management process and ICAAP, if it appears that a bank has inappropriate risk management, it does not have an appropriate process to assess capital adequacy in relation to their risk profile, or it maintains a capital amount that is inadequate to cover its risk level, the BOT can take corrective measures immediately. The corrective measures include requiring the bank (i) to mitigate risk exposure, (ii) to maintain capital higher than minimum capital requirements; and/or (iii) to submit a recapitalization plan to the BOT. In addition to capital requirement, the BOT may impose a limit on material risk exposures. For instance, the BOT currently imposes net FX Position both on individual currency and on aggregate basis as stipulated by the BOT Notification No. FPG. 74/2551: Regulations on Foreign Exchange Positions for Commercial Banks exclude Retail Banks. There is only one retail bank in Thailand. |
| EC4 | The prescribed capital requirements reflect the risk profile and systemic importance of banks48 in the context of the markets and macroeconomic conditions in which they operate and constrain the build-up of leverage in banks and the banking sector. Laws and regulations in a particular jurisdiction may set higher overall capital adequacy standards than the applicable Basel requirements. |
| Description and findings re EC4 | Domestic systemically important banks (D-SIBs) are required to hold higher loss absorbency (HLA) of 1 percent and subject to additional prudential requirements to reduce their probability of failure. This new requirement is subject to a 2-year phase-in arrangement, starting at 0.5 percent in 2019 and 1 percent in 2020. Presently, all D-SIBs are robust, maintaining capital ratios significantly above the level prescribed by BOT. The BOT will review and announce the D-SIBs list annually (BOT Notification No. FPG. 16/2560: The Assessment Methodology and Supervisory Measures for Domestic Systemically Important Banks (D-SIBs). Five D-SIBs have been identified. In addition, BOT monitors the build-up of leverage in the banking sector through the movement of leverage ratio quarterly. The BOT has monitored leverage ratio of banks since 2014 and they are all well above the minimum threshold of 3 percent. The leverage of the Thai banking sector stoodwell above the minimum threshold at the end of 2017. |
| EC5 | The use of banks’ internal assessments of risk as inputs to the calculation of regulatory capital is approved by the supervisor. If the supervisor approves such use:
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| Description and findings re EC5 | The use of internal risk assessments to calculate regulatory capital requires prior approval from the BOT. The BOT has a Risk Assessment and Modelling Department with 11 staff who have specialized skills in risk modelling are responsible for assessing the banks’ internal risk models in line with the Basel standards as specified in relevant BOT’s notifications (BOT Notification No. FPG. 16/2555 and BOT Notification No. FPG. 94/2551). Currently, there are three locally-incorporated banks adopting the Internal rating-based (IRB) approach and three foreign bank branches using the internal model approach for market risk. Details on internal model assessment as follows: (1) The BOT Notification No. FPG. 16/2555: Regulation on the Calculation of Credit Risk-Weighted Assets for Commercial Banks under Internal Ratings-Based Approach (IRB) requires that banks obtain prior approval from the BOT for the use of own internal tools in estimating credit losses (internal-ratings based (IRB) approach) to calculate credit risk-weighted assets. As part of the application process, banks must demonstrate to the BOT that they have in place an IRB rollout plan, an integrated system to calculate capital, a reliable model development and validation policy and adequately skilled staff. The BOT review will focus on reliable source of data, model design and development, independent model validation process and model performance. The BOT Notification No. FPG. 94/2551: Regulations on Market Risk and Capital Requirements for Market Risk of Financial Institutions requires that banks obtain prior approval from the BOT for the use an internal model to calculate regulatory capital for market risk. To use the internal model for market risk in the regulatory capital calculation, banks must demonstrate that they have an effective market risk management system and skilled resources to monitor and review market risk. Banks shall monitor their procedure of internal risk management system and use the internal model for a long enough period so that the BOT can take such information into consideration for granting an approval. Particularly, the BOT will review consistency and reliability of data used to run the internal model, verify accuracy and timeliness of volatility and correlation data, assess appropriateness of model assumptions and methodologies, and validate accuracy of risk measurement model through back testing. (2) Banks that wish to revise or modify their internal rating system or model used for estimating risk components must consult with the BOT on a case-by-case basis. Depending on the nature and scale of modification, the BOT may conduct onsite validation before approving the modification. Model verification is performed according to the manual to help maintain assessment quality. The inspection report will be sent to various departments including Regulatory Policy Department, Financial Institution Applications Department and Onsite Examination Department in obtain opinion and check & balance. The BOT gives high priority to the minimum requirements of using an internal model for capital purposes, particularly model accuracy and data sufficiency where conservatism must be applied. If the BOT finds that banks do not follow the BOT standards, minimum requirements or conditions stated in the approval letters, the BOT has the power to revoke the approval for banks to the use internal model to calculate regulatory capital. This has occurred only one single time in the past. |
| EC6 | The supervisor has the power to require banks to adopt a forward-looking approach to capital management (including the conduct of appropriate stress testing).49 The supervisor has the power to require banks:
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| Description and findings re EC6 | According to the BOT Notification No. SVG. 5/2552: Supervisory Guideline on Capital Fund under Pillar 2, banks are required to implement Internal Capital Adequacy Assessment Process (ICAAP) that covers all significant risks and to maintain capital adequacy to guard against such risks by considering bank’s present and future business environment. Banks are to perform the ICAAP assessment at least annually, both under normal and crisis conditions, as well as conduct stress tests and use the test results as an input in the assessment of capital adequacy and development of suitable capital planning. Scenarios used in a stress test should be forward-looking and subject to a regular review to ensure that they are consistent with changing environments or risk factors. Apart from internal stress testing, locally-incorporated banks are required to perform supervisory stress testing (macro variables and scenarios set by the BOT) once a year as a complementary stress test. The supervisory stress testing will cover at the minimum credit risk, market risk and liquidity risk. The banks must submit the stress test results, which are approved by the banks’ Board, to the BOT. On capital planning, banks are required to develop a capital plan under normal circumstances which includes the plan for the next three years in accordance with its future business plan and risk tolerance approved by the Board. The capital plan must take into consideration significant impacts from stress testing and the banks must specify a capital increase scheme to support the plan and prepare a contingency plan to deal with unexpected events which could render the banks’ ability to exercise the capital increase plan. The BOT supervisors have a mandate to review capital components and criteria in accordance with the Pillar 1 minimum capital requirement and evaluate an assessment of the ICAAP and stress test. To ensure effectiveness and continuous development of banks’ ICAAP, the BOT supervisors will discuss with the banks’ management the assumptions, tools, methodologies of the ICAAP process as well as the resulting capital plan and risk management. If the banks’ ICAAP is deemed inappropriate or the capital fund is insufficient to accommodate the risks, the BOT can either instruct the banks to improve their risk management commensurate to the level of risk within a reasonable timeframe, or to require the banks to maintain capital above the minimum requirement |
| AC1 | For non-internationally active banks, capital requirements, including the definition of capital, the risk coverage, the method of calculation, the scope of application and the capital required, are broadly consistent with the principles of the applicable Basel standards relevant to internationally active banks. |
| Description and findings re AC1 | As mentioned in EC2, currently, the BOT applies the capital adequacy framework consistent with Basel standards to all locally-incorporated banks. It also identifies and agrees on an internal trigger point that when it is breached, the bank needs to inform the BOT. |
| AC2 | The supervisor requires adequate distribution of capital within different entities of a banking group according to the allocation of risks.50 |
| Description and findings re AC2 | Section 57 of FIBA authorizes the BOT to supervise and examine financial institutions, their parent company, subsidiaries and affiliates as if they are the same legal person in accordance with the rules and regulations prescribed in the BOT notifications unless the law regulating the business of these companies already prescribes specific rules and regulations. Moreover, the BOT has the power to prescribe the ratio of capital funds or equity of a financial business group in proportion to its assets, liabilities, contingent liabilities or variables and any other risks, or to prescribe other ratios for financial business group of financial institutions. The BOT Notification No. FPG. 9/2561 requires that the banking groups (both solo consolidation and full consolidation) have sufficient capital consistent with the exposures of the group companies. Insurance companies which are not included in consolidated financial statements are subject to threshold deduction and the supervision of the OIC. Currently, the BOT does not specify a capital ratio for each affiliate within the banking group. However, entities with significant exposures are those under supervision of the BOT or other Thai regulators i.e., the SEC and the OIC. The SEC and OIC require the entities under their supervision to maintain capital based on risk exposures. Affiliate entities that engage in credit-granting business or similar-to-credit-granting business are under the BOT solo consolidation supervision, where they are required to comply with asset classification and provisioning, credit risk management of loan portfolios, etc. This would ensure that the banking group has adequate capital for the risk exposures and that the capital is appropriately allocated across the entities within the banking group and aligned with risk exposure within the group. |
| Assessment of Principle 16 | Compliant |
| Comments | The assessors reviewed the BOT regulations for compliance with the Basel standards. The assessors also reviewed an ICAAP and the BOT assessment of the ICAAP and concluded that the BOT’s assessment and analysis was thorough and consistent. The assessors discussed the approval, application, and BOT review processes for advanced IRB and other modeling approaches with the Head of the modelling unit and reviewed supporting documents. The BOT sets prudent and appropriate capital adequacy requirements for banks that reflects the risks undertaken by banks in the market in which it operated. The components of capital absorb losses and the capital requirements are not less than the Basel standards. The assessors recommend th the BOT build a more integrated approach towards Pillar 2, starting by tdeveloping a methodology to set individual bank capital ratios as part of its risk based supervisory framework. |
| Principle 17 | Credit risk.51 The supervisor determines that banks have an adequate credit risk management process that takes into account their risk appetite, risk profile and market and macroeconomic conditions. This includes prudent policies and processes to identify, measure, evaluate, monitor, report and control or mitigate credit risk52 (including counterparty credit risk)53 on a timely basis. The full credit lifecycle is covered including credit underwriting, credit evaluation, and the ongoing management of the bank’s loan and investment portfolios. |
| Essential criteria | |
| EC1 | Laws, regulations or the supervisor require banks to have appropriate credit risk management processes that provide a comprehensive bank-wide view of credit risk exposures. The supervisor determines that the processes are consistent with the risk appetite, risk profile, systemic importance, and capital strength of the bank, take into account market and macroeconomic conditions and result in prudent standards of credit underwriting, evaluation, administration and monitoring. |
| Description and findings re EC1 | According to the BOT Notification No. FPG. 10/2561: Corporate Governance of Financial Institutions issued under section 41 and 84 of FIBA, financial institution’s Boards shall approve effective risk governance framework including risk appetite, risk management policy and strategy, and ensuring that comprehensive risk management process and system are in place to provide a comprehensive bank wide view of all material risks including credit risk. In addition, under the BOT Policy Statement on Credit Transaction, BOT Policy Statement on Credit Reviews and Supervisory Manual on Credit Risk, banks are expected to:
The BOT supervisors monitor credit risk/credit risk management of banks on an ongoing basis using data from bank submission. During onsite examination, the BOT supervisor will conduct transaction testing, interview with management, and a walkthrough of credit approval and credit risk management process. In case where the BOT observes any deficiencies, an order for corrective action may be issued. |
| EC2 | The supervisor determines that a bank’s Board approves, and regularly reviews, the credit risk management strategy and significant policies and processes for assuming,54 identifying, measuring, evaluating, monitoring, reporting, and controlling or mitigating credit risk (including counterparty credit risk and associated potential future exposure) and that these are consistent with the risk appetite set by the Board. The supervisor also determines that senior management implements the credit risk strategy approved by the Board and develops the aforementioned policies and processes. |
| Description and findings re EC2 | Under the ongoing supervision framework, the BOT supervisors check whether banks’ Board approves and regularly reviews the banks’ credit risk management strategy and significant policies and processes to be in line with risk appetite set by the Board. In addition, the BOT supervisors will evaluate the role of senior management in adopting strategy as approved by the Board and developing policies and processes to support such strategy. In this regard, the BOT supervisors review the banks’ documents on credit risk management strategies, policies and processes, minutes of the Board and relevant committees, as well as conduct an interview with bank management to assess whether the credit risk management strategies, policies and processes cover assessment, measurement, monitoring, control, and mitigation of risks for all products and transactions that carry credit risk and are consistent with banks’ size and complexity and the risk appetite approved by the Board. In addition, the BOT supervisors will also assess the Board and relevant committee members understanding of the banks’ credit risk and evaluate if they carry out their roles and responsibilities of credit risk oversight with integrity and independence. The BOT supervisor determines if senior management carrying out their roles in (i) establishing and proposing credit risk management processes in line with strategies and policies approved by the Board, (ii) effectively implementing and communicating those credit strategies, policies, and processes throughout organizations, (iii) overseeing the day to day operations to comply with banks’ own strategy, policies, and processes and the BOT guidelines and regulations as mentioned in EC1. The assessment involves reviewing meeting minutes of the Board and relevant committees and supporting documents/guidelines of employees’ communication, sample of credit files, internal reports, and credit process to ensure that each stage of the process is carried out as stated (e.g., credit approval, issuance of credit rating, loan disbursement, loan review, monitoring and controlling of limits). |
| EC3 | The supervisor requires, and regularly determines, that such policies and processes establish an appropriate and properly controlled credit risk environment, including:
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| Description and findings re EC3 | As mentioned in EC1, banks should have adequate and comprehensive policies and processes related to credit exposures that are effectively communicated and implemented throughout the banking organization to promote prudent credit culture and properly controlled credit risk environment. Under ongoing supervision framework, the BOT supervisors assess the adequacy, coverage, suitability and effectiveness of banks’ credit risk management policies and processes in promoting prudent credit culture and properly controlled credit risk environment by reviewing the documents submitted by the banks, conducting a walk-through review of the end-to-end processes, testing a sample of transactions and credit files, and interviewing related parties during onsite examination to assess whether the prescribed policies and procedures appropriately address the banks’ risks, size, and complexity and are followed in day-to-day operations under effective internal controls.
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