The Risk Management of Commercial Banks:
Thailand’s Experience
Suchada Dejtrakul
Bank of Thailand
ASEAN+3 Workshop on
Reform and Development of Banking Sector in China
Shanghai National Accounting Institute, Shanghai, P.R. China
24-26 May 2005
1
Financial Institutions Performance
Financial Institution
Thai Banks
Foreign Branches
Stand-alone IBFs
Finance Companies
Credit foncier Companies
Total
Loans of Financial Institutions
(billion baht)
5,500
% YoY
Loan outstanding
Loan growth
15
4,970.3
4,757.7
4,000
8.6
4.5
4,500
-4.4
-11
2004
13
18
5
18
5
59
12
18
4
18
5
57
Non-Performing Loan (NPL)
50
5,395.3 20
17.1
5,135.5
5,000
%
2003
4,251.7
4,064.6
3,500
5
0
38.9
30
17.9
20
15.7
12.7
-5
10.8
10
10.5
-15
-20
1999 2000 2001 2002 2003 2004
NPL
10
-10
-17.2
40
0
1999
2000 2001
2002 2003
2
2004
Development of Risk Management in Thailand
1993
Basel I (Credit risk) was applied to financial institutions
1999
BOT’s supervision and examination of financial institutions has
focused on risk management
Sep 2002
Issued policy statements on liquidity risk management
Dec 2003
Issued the market risk supervision policy
Published risk-based examination manuals covering strategic,
credit, market, liquidity, and operational risks
Aug 2004
Issued standard template for collection of operational loss data
and supporting guidelines on operational risk management
Dec 2004
Issued a supervision policy on interest rate risk in banking book
Feb 2005
Published prudential guidelines on Internal Rating System, Credit
Scoring System, Market and Credit Risk Stress Testing, Risk
Model Validation, and Loan Portfolio Management
3
Risk Management System
The BOT assesses financial institutions
risk management system in 5 areas
• Strategic Risk
• Credit Risk
• Market Risk
• Liquidity Risk
• Operational Risk
4
Supporting Factors for Risk Management.
1
Involve of
the board of directors
and high level management
4
Set up risk
management system
2
Effective Risk
Management
Establish a unit to operate
risk management
Formulate risk
management policies
and procedures
3
5
Limitations to Risk Management
Limitations
Involve of the board of directors
and high level management




Formulate risk management
policy and procedures




Establish a unit to operate
risk management



Set up risk management
system



Not enough cooperation
Low qualification
Lack of independence to make a decision
Not transparence
Policies/ procedures not match with risks
Underdevelopment Infrastructure
Rigid to implement
Communication failure
Lack of adequate structure
Staff has less experience
Lack of independence
No follow up and control system
Not enough risk assessment/ management
instruments
Database and IT system
6
1. Market Risk
Interest rate risk, Equity price risk, Exchange rate risk and Commodity price risk
Guidelines
Board of Director
Approve and review risk strategies and policies
Risk assessment
Have adequate risk measurement and reliable tools
Risk report
Effective follow up and report
Risk control
Establish risk limits
Limitations
• Not enough instruments to manage market risk
• Limitation of market players and types of instruments
• Market risk is complex. The understanding is limited to a small group of
people
• Lack of staff who are expert in both products and management => high
turnover
7
2. Liquidity Risk
Guidelines
Board of Director
Authorize the policy and action plan as well as
monitor the implementation
Risk control
Have internal control system that can track and
monitor the liquidity risk management system
Must monitor exposure in domestic and foreign
currencies under relevant scenarios.
Risk report
Set up an effective and efficient reporting system that
generates sufficient information for management to
make a decision in a timely manner
Limitations
• No emergency plans to support liquidity risk or have but not well developed
• Never test emergency plan
8
3. Credit Risk
Guidelines
Board of Director
Assign acceptable risk limit
Risk assessment
Develop model to assess risk (statistic, expert opinion)
Assess risk amount and component (sensitivity
analysis, stress test)
Risk report
Risk analysis and report, have early warning indicators
Risk control
Internal control and examination
Limitations
• Lending remain concentrate in some specific areas => concentrate risk
• Do not have system to assess risk
• Use traditional approach to manage risk
• Slow development of statistical based approach (lack of IT and data
management)
9
4. Strategic Risk
Guidelines
Board of Director
Have experience, responsibility and good governance
Risk assessment
Strategic plan in line with FI’s main objective
Risk report
Have independence unit to assess and report risk
Precise and up to date data and support decision
making
Limitations
• Have not establish a unit to manage strategic risk or set up only a
committee
• Assign only executives from core department to conduct strategic plan
which should include support department as well
• Board of director should not only approve but should participate in
conducting strategic plan
• Set up unrealistic goals
10
5. Operational Risk
Limitations
• Lack of effective information systems  information disruption
• No regulations or policies  delay report of defaults  delay problems
solving
• No self-assessment policy or survey of training need
11
Basel II implementation Milestones
Year
Description
2005
Issue series of consultative papers, conduct industry
hearing and finalize the Basel II framework
June 2006
Banks to submit Basel II implementation plans for
approval
Year end 2007 Begin Parallel calculation of Basel I & Basel II
(one year for simple approaches, two for advanced)
Year end 2008
Year end 2009

Begin new Basel II capital charge (SA, FIRB)

Continue parallel calculation (AIRB, AMA)
Begin new Basel II capital charge (AIRB, AMA)
12
Approach to calculate capital requirement
under Basel II
Financial Institutions are require to maintain capital funds against

Credit Risk (improved)

Market Risk (same as Basel I)

Operational Risk (additional)
Credit Risk
1. Standardised Approach
2. Internal Ratings-Based Approach
2.1 Foundation Internal Ratings-Based Approach
2.2 Advanced Internal Ratings-Based Approach
Market Risk
1. Standardised approach
2. Internal model approach
3. Mixed approach between standardised and internal approaches
Operational
Risk
1. Basic Indicator Approach
2. Standardised Approach
3. Advanced Measurement Approach
13