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GURU SPEAK

The cursed life: FIDF's decision and the loss of Thai banking's competitiveness

Piyasak Manason

BANGKOK: -- When the Thai Bankers' Association said that the government decision to transfer the interest burden of the bailout fund from the government to commercial banks was an unfair decision, he actually addressed a centuries-old problem: society's prejudice towards the banking industry.

From ancient times up to the modern day, society has been contemptuous of the financial industry. In Shakespeare's "Merchant of Venice", the greedy moneylender Shylock asks for a "pound of flesh" from his borrower when his bond is not honoured. Centuries later, "Occupy Wall Street" protesters cry that a malign 1 per cent of the population, many of them "fat cat" executives and financiers, are taking advantage of the honest 99 per cent.

The government-drafted law follows the same logic. It proposes that the Bank of Thailand (BOT) take over the interest expenses of the Financial Institutions Development Fund (FIDF), which issued bonds to bail out bankrupt financial institutions during Thailand's financial crisis 15 years ago. As a result, it allows the BOT to raise premium from commercial banks to foot the bill. The logic? The crisis was the result of financial institutions' relentless lending; using money from existing banks to pay for the cost is hence reasonable.

Actually, it is not. Pick up any textbook on macroeconomics and you will see that Thailand's crisis was the result of macroeconomic policy failure. The so-called Impossible Trinity - the monetary-policy cocktail that consists of a too-strong exchange rate policy, too-high interest rate policy and capital liberalisation allowing inflows of money from currency speculators - is the main culprit. Thailand had all that. Hence it is not so difficult to see who should be responsible for all those costs.

Instead, penalising the commercial banks will create three important side-effects.

L The first is that the competitiveness of Thailand's financial industry will decline further from its already-poor status. Our financial industry is ranked 35th out of 60 globally - much lower than Singapore's (4th) and Malaysia's (16th).

Such a low ranking is, at least partially, due to Thailand's unnecessarily strict financial regulation. For example, our Capital Adequacy Ratio and Liquidity Ratio are much higher than the international standard. Although this seems prudent, it demotivates commercial banks to lend, resulting in low levels of private investment, especially after 1997. But most of all, the current deposit premium banks pay to the Deposit Protection Agency (DPA), at 0.4 per cent of total deposit, is one of the world's highest, and appreciably higher than neighbouring countries, where the rate is calculated based on the insured deposit, not the total. The high ratio undoubtedly leads to banks' higher costs here. An even higher ratio would undoubtedly lead to further decline in competitiveness of Thailand's financial sector.

L Second, the competitiveness of commercial banks relative to state banks will decline. After the Asian crisis, authorities gave leverage to state banks at the expense of their commercial peers. State banks are not subject to the 0.4-per-cent DPA contribution or any income tax, while their deposits are implicitly guaranteed. They are subject to a different regulator and regulations, while their lending to special groups is encouraged by the government's populist policies. No wonder, then, that their loans and deposits outstanding have increased by 100 per cent in five years, while those of commercial banks increased by just 41 per cent and 17 per cent respectively. The higher DPA fee for commercial banks will undoubtedly lead to further deterioration of their competitiveness.

L Third, the competitiveness of small commercial banks will deteriorate compared to the large ones. This is because small banks have limited pricing power, or the ability to passing cost on to borrowers and lenders. On the funding side, since a large proportion of funding is in fixed-deposit, which is more sensitive to changes in interest rate, small banks cannot lower their saving rate easily. Moreover, the proposal to collect premium on Bills of Exchange (B/E), if passed, would mean that they cannot rely on B/E as their main funding source as before. On the asset side, a large proportion of small banks' portfolio is in long-duration assets, which are difficult to raise the lending rate for to cope with the higher funding cost.

In contrast, large banks have a large proportion of their funding mix in current and saving account, which is insensitive to changes in the saving rate, while their loan mix largely consists of short-duration assets, hence allowing them to raise lending rates and lower deposit rates. In effect, it is easier for the large commercial banks to pass their funding costs to borrowers and lenders.

Although smaller banks' business practice is as efficient and prudent as their large peers (considering their low NPLs and high profit margins), their limited pricing power weighs heavily on their financial statements. It goes without saying, then, that they, as well as their bigger peers, will be more vulnerable to foreign take-over bids in the near future, especially when the Asean Economic community (AEC) agreement comes into full force, considering that the average asset size of Singaporean and Malaysian big banks is at least 1.5 times larger than their Thai counterparts.

Along with other places in the world, the life of a banker in Thailand is already cursed by public prejudice. A poorly formulated economic policy will only make matters worse.

Piyasak Manason is vice president for research and planning at Kiatnakin Bank.

-- The Nation 2012-01-27

[sparebox2]

Someone have to pay for the "fat cat".

And it is usually the poor tax payer.

This is not localized in Thailand, it is worldwide.

Go watch the movie http://en.wikipedia.org/wiki/Inside_Job_(film)

Edited January 27, 2012 by sparebox2

[laocowboy2]

!00% correct. Once again it's politicians acting as usual (most obviously skipped the economics classes at schools). We need money for the people (translation - we need other peoples' money to bribe the electorate (less my cut of course)) and as all the money is in the banks - let them pay our debts so that we do not have to.

Thai banks already have poor returns by regional standards. The extra costs can only be met by (a) cutting already low deposit rates, ( jacking up interest rates on loans, © incressing fees charged for services or (d) cutting back on investment. In reality they will try a little of each but it will not be enough. So profitability will fall further - which will make it even harder for banks to atract additional capital

This prospect of incresed costs probably played a role is the HSBC decision to sell the deposit sid of their buiness to BAY.

[12DrinkMore]

Here we go again, a call from a banker to introduce lax regulations so that the bankers can make more money.

I do not understand why he is citing Malaysia and Singapore, Thailand is Thailand and the banking system must be regulated for the benefit of the Thai people and not the bankers' profits, which are certainly not synonymous.

If the tighter banking regulations keep the massive global userers out of Thailand, then even better. They have screwed up Europe and the States.

The Thai banking system, indeed any banking system, should be there to provide liquidity in the economy and benefit real productive activity such as farming, manufacturing and tourism.

You only have to ask yourself where the humongous profits and bonuses come from. Banks do not produce anything, they only extract a rent from the economy. The profits are NOT the result of added value, they are simply the result of wealth extraction from the real wealth producers. The taxes they pay are essentially paid for by the real wealth producers, and not something extra.

Thailand should keep the bankers firmly under control, unlike the west, where the bastards have run rampant and destroyed the economies. The government focus must be on education and encouraging investment in manufacturing.

The rate of money creation should reside with the government, and here it is great that the government owned banks have an advantage.

Once those leeches in the banks gain total control over your monetary system, they will screw you into poverty.