Financial markets / Financial institutions / Banks : The Regulation of Financial Institutions

Overview
- Since banks play the most significant role in the Thai system of financial institutions, most currently regulations of financial institutions have to do with improving the operations, resolving the problems and enhancing the performance of banks. A number of regulations are also in enforcement on other similar institutions such as finance companies, credit fonciers and state financial enterprises.
- Financial institutions, especially banks, are regulated under the Financial Institution Business Act of 2008, which gave the BOT authority to issue regulations, announcements and circular notices binding on deposit institutions such as banks, finance companies and credit fonciers. The Ministry of Finance also has a role in regulating financial institutions through the issuance of business licenses, capital increase, interventions into the conduct of businesses and business closures.
- There has been clear improvement in the regulation of financial institutions since the economic crisis of 1997. In addition to addressing the operational weaknesses that led to the crisis, changes have been made consistent with the increasingly complex scope of business and financial transactions engaged in by financial institutions. For example, before the crisis, loan loss reserves were not strictly regulated. The laws and BOT announcements broadly defined non-performing loans (NPLs), for example, as assets that had no value or that could not be collected, or that were suspected to be such, for example, where the debtor was more than a year in arrears on interest payments. In such situations, banks were to write off the loans or to have sufficient reserves to cover them. After the crisis, the BOT required banks to slot loans into five categories by how long they have been in arrears and to maintain reserves at the corresponding prescribed rate, with a maximum of 100 percent of outstanding value less collateral for NPLs.
- In a number of cases, it was found that the new and altered regulations affected the performance of financial institutions. For example, the categorization of loans noted above forced private sector banks to report net losses and to undertake capital increases of 100 billion THB (three billion USD) from 1997 to 2000.