Saturday, August 15, 2020

Central bank soothes investors, saying new measures aim to avoid a repeat of 1997

Jun 23. 2020
BOT deputy governor Ronadol Numnonda
BOT deputy governor Ronadol Numnonda
Facebook Twitter

By The Nation

The Bank of Thailand (BOT) has launched pre-emptive measures to prevent a financial crisis like the one in 1997, BOT deputy governor Ronadol Numnonda said in response to investors’ concerns about the resilience of local commercial banks in the Covid-19 fallout. 

The Stock Exchange of Thailand (SET) Index closed at 1,352.18 on Monday (June 22), down 18.64 points or 1.36 per cent. Total transaction volume was Bt65.772 billion with an index high of 1,367.98 and a low of 1,347.60. Stock analysts are blaming the central bank’s measures for pulling down the index. 

BOT on Friday ordered commercial banks to hold off on paying interim dividends and also stopped them from buying back shares to strengthen their capital ratio in response to the pandemic. 

To clarify this move, Ronadol said the central bank was only taking pre-emptive measures. 

“We have learned from the 1997 crisis that we should not let the situation get out of hand. At that time, bad loans skyrocketed to 50 per cent of total bank loans because no pre-emptive measures had been taken. Today, we are implementing preventive measures and bad debts are just 3.05 per cent of total bank loans,” he said. 

Bad debts stood at Bt490 billion at the end of this year’s first quarter. 

BOT has also called on commercial banks to conduct a stress test on the management of their capital in the next one to three years. 

Bank capital adequacy ratio is at the heart of the banking business, as it underpins bank lending and reserves against risk assets in case debtors get into trouble in the future. 

Banks are expected to submit results of their stress test to BOT as of late July. 

Ronadol, meanwhile, reassured investors that banks have strong capital. As of the end of the first quarter, the average BIS capital adequacy ratio was 18.7 per cent, which can be considered relatively high compared to the minimum requirement of 8.5 per cent, he said. 

During the 1997 financial crisis, the BIS ratio was 8.1 per cent. 

“After consulting with bankers, we believe that when  BIS ratio is between 11.5 and 12.5 per cent, banks could handle the Covid-19 fallout,” he said. 

If the BIS ratio falls below that level, banks will have to conduct capitalisation through different methods, such as holding off on paying dividends or buying back shares. Banks can also increase their Tier 1 capital by selling shares or raise Tier 2 capital by issuing debentures, he said.

Tags:
Facebook Twitter
More in Business
Editor’s Picks
wmg-logo
Top News
wmg-logo