Financial system is not immune to weak political environment
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A recent surge in cash withdrawals from the Government Savings Bank was politically motivated and not a sign of a loss of confidence in any bank, said Standard & Poor's Ratings Services. Yet, this incident suggests the currently weak political environmen
"GSB was caught in the crossfire. The run on the bank was limited in nature and is unlikely to have a contagion impact on the banking system," said Standard & Poor's credit analyst Deepali Seth. "But the incident has exposed the vulnerability of the financial system."
A reported Bt60 billion (US$1.8 billion) in net deposits was withdrawn from GSB in just three days, or about 3 per cent of its deposit base. The surge in withdrawals marked a political backlash after GSB extended a loan to the government-owned Bank for Agriculture and Agricultural Cooperatives (BAAC), which is the paying agent for a controversial rice-subsidy scheme.
A continued surge in withdrawals would have tested the support framework for government-owned specialized financial institutions (SFIs). The Thai government fully guarantees GSB's deposits, but the current caretaker government could have found it difficult to take immediate action to support them.
S&P noted that GSB had excess liquidity at the time of the event and so it was able to survive the pressure on withdrawals. If the surge had persisted for a few more days, the financial sector could have been hit because of the banks' interconnectedness through the interbank markets.
SFIs, such as GSB and BAAC, operate under different regulations to commercial banks. Accordingly, the central bank, Bank of Thailand, is not the lender of last resort for SFIs, which collectively form about 20 per cent of Thailand's financial system. As such, the SFIs would be dependent on the interbank market or support from other institutions. The funds from these sources often dry out in a crisis. Nevertheless, SFIs can resort to collateralized overnight borrowing from the central bank to meet critical funding needs.
"Our base-case expectation is that the Thai banking sector can remain stable, but the risks have increased. We don't expect political issues to be resolved any time soon, and that means further vulnerability for Thai banks," said Standard & Poor's credit analyst Geeta Chugh.
