Preparation for Implementation of Basel II in Thailand

1. A forward-looking organization with competent staff dedicated to ensuring the resilience of the Thai economy against shock and instability Preparation for Implementation of Basel II in Thailand Ronadol Numnonda, CFA Director of Planning and Development Department Supervision Group Bank of Thailand 14th March 2008

2. Introduction to Basel II Implementation Basel II Implementation in Thailand Next steps Agenda

3. Introduction to Basel IIImplementation Implementing Basel II is a long road for everybody Alicia Garcia Herrero, “ what can financial regulation do to ensure stable credit in emerging countries” , Beijing, June 7, 2007

4. Introduction to Basel IIImplementation But road may be very different Alicia Garcia Herrero, “ what can financial regulation do to ensure stable credit in emerging countries” , Beijing, June 7, 2007

5. Introduction to Basel IIImplementation Alicia Garcia Herrero, “ what can financial regulation do to ensure stable credit in emerging countries” , Beijing, June 7, 2007

6. Introduction to Basel IIImplementation But road may be very different Alicia Garcia Herrero, “ what can financial regulation do to ensure stable credit in emerging countries” , Beijing, June 7, 2007

7. Introduction to Basel IIImplementation Alicia Garcia Herrero, “ what can financial regulation do to ensure stable credit in emerging countries” , Beijing, June 7, 2007

8. Introduction to Basel IIImplementation How to introduce Basel II ? • Not a single answer • Depends on the authorities’ decisions and readiness of the financial sector • Never quick and easy • Necessary steps for building a road of Basel II • Assessing the current environment • Making a plan • Setting up a project • Testing (and, if need be, improving) the foundation • Constructing the road Alicia Garcia Herrero, “ what can financial regulation do to ensure stable credit in emerging countries” , Beijing, June 7, 2007

9. Introduction to Basel II Implementation Basel II Implementation in Thailand Next steps Agenda

10. Basel II Implementation in Thailand steps for introducing Basel II in Thailand • The Bank of Thailand follows quite the similar steps Necessary Steps Assessing current environment Set up preferred target Set up plan Testing the foundation Constructing the road

11. Basel II Implementation in Thailand Assessing current environment Set up preferred target Set up plan Testing the foundation Constructing the road • Infrastructures of Financial System • Laws and regulations • Supervisory tools • Readiness of regulators • Risk based supervision • The healthiness of Thai financial system • Financial structure • Capital adequacy • Risk management systems • Risk awareness • The healthiness of Thai economy

12. Basel II Implementation in Thailand Thai Financial System Under Supervision of BOT • Locally incorporated banks (14) • Retail banks (3) • Branches of foreign banks (17) • Finance companies (5) • Credit foncier companies (3) Under Supervision of Other Authorities • Other financial institutions i.e. • Specialized financial institutions regulated by MOF • Securitiescompanies, mutual funds regulated by SEC • Insurance companies regulated by MOC

13. Basel II Implementation in Thailand Total Assets of FIs under BOT’s supervision (As of December 2007) Agenda 63.14 % 25.4% 11.46% Big size Medium size Smallsize

14. Basel II Implementation in Thailand Assessing current environment Set up preferred target Set up plan Testing the foundation Constructing the road • Apply only to commercial banks, including retail banks • Currently based on a solo basis until the BOT releases the consolidated supervision (tentatively by 2010) • Pillar 1, 2, & 3 will be implemented on the same effective date (as of the year end 2008) • Various Pillar 1 approaches are available for banks, however some approaches are subject to BOT prior approval • National discretions are recognized • Promote effective home/host supervisions

15. Basel II Implementation in Thailand Approaches for credit and operational risks * If banks use IRB for CR, they must use SA-OR as a minimum for OR

16. Basel II Implementation in Thailand Important National Discretion - SA

17. Basel II Implementation in Thailand Important National Discretion - SA

18. Basel II Implementation in Thailand Important National Discretion – IRB

19. Basel II Implementation in Thailand Important National Discretion – IRB (Cont.)

20. Basel II Implementation in Thailand Set up plan Assessing current environment Set up preferred target Testing the foundation Constructing the road Implementation Timeframe AIRB Approval process BOT issued the final draft of Policy Statement SA/FIRB Approval process Q3 Q3 Q3 Jun Dec Dec Dec Q1 Dec Dec Sep 2009 2007 2008 2006 2006 2006 2010 Banks to submit final application Banks submitted preliminary implementation plans Operational riskBIA/SA PC X X X Credit riskSSA/SA PC X X X FIRB PC X (95%) X (90%) X (80%) AIRB PC PC X (90%) X (80%) Quantitative impact study PC = Parallel Calculation X = implementation year xx% = Floor

21. Basel II Implementation in Thailand Set up plan Assessing current environment Set up preferred target Testing the foundation Constructing the road Implementation timeframe Once the effective targeted date designed, implementation plans were worked backward by both BOT and banks BOT Basel II Project End of 2008 Banks

22. Basel II Implementation in Thailand What BOT has done so far to prepare for a success Basel II Implementation ? • Coordinate project between policy and supervision groups Set up Basel II Project • between bankers and regulators Established working group Communication is a key success factor

23. Basel II Implementation in Thailand Structure of Basel II project Chair person: Deputy GovernorCommittees: Assistant Governors Senior Director Directors Steering committee Project Manager Various working groups are set up Working groups Policy Supervision

24. Basel II Implementation in Thailand Various Working Groups Examination Manualfor credit risk IRB Examination Manual for credit risk SA working group for Training development In- house Examination Manual for IT Examination Manual for Pillar III FIs Approval Process and Guidelines Examination Manualfor OperationriskBIA & SA Policy setting Data reporting Manual for Offsite monitoring Examination Manual based on Pillar II Framework working groups for manual development • Organize exhibition/ meetings • issuing newsletters • write up a summary of progress report Basel II Project coordinator

25. Basel II Implementation in Thailand Set up plan Assessing current environment Set up preferred target Testing the foundation Constructing the road Readiness of infrastructure Key foundations Readiness of regulator Readiness of banks

26. Basel II Implementation in Thailand Set up plan Assessing current environment Set up preferred target Testing the foundation Constructing the road • Testing the readiness on infrastructure of the financial system • IT infrastructure as well as data in term of quality, categories, and transparency needed to be improved • Human resources especially on financial engineering needed to be built • Efficiency of service information providers need to be improved

27. Basel II Implementation in Thailand Set up plan Assessing current environment Set up preferred target Testing the foundation Constructing the road • Testing the readiness on regulator’s side • Capabilities of supervisors needed to be enhanced • Training programs • Communication channels Ex. meeting, Basel II website, Monthly Newsletter, etc. • Supervisory process as well as reporting infrastructures need to be reviewed and strengthened • ICAAP review process, risk measurement tools • Approval process, establish ECAIs recognition framework • Supervisory as well as risk management tools need to be reviewed, improved, and introduced • Policy guidelines, examination manuals, PPA & PCA

28. Basel II Implementation in Thailand For internal stakeholders

29. Basel II Implementation in Thailand For internal stakeholders

30. Basel II Implementation in Thailand For internal stakeholders

31. Basel II Implementation in Thailand For external stakeholders

32. Basel II Implementation in Thailand Set up plan Assessing current environment Set up preferred target Testing the foundation Constructing the road • Testing the readiness on banks’ side : by conduction onsite examination • IT infrastructure as well as data quality and categories needed to be improved • Data collection, storage, processing, transmitting, and reporting • Calculation engine • Core banking system • Risk management, internal process, control, and governance needed to be strengthen • ICAAP • Risk rating systems • Capabilities of staff needed to be enhanced • Training current staff

33. Basel II Implementation in Thailand Set up plan Assessing current environment Set up preferred target Testing the foundation Constructing the road • within BOT • with banks: Banks' Risk Management Working Group • with other stakeholders: MOF, SEC • with other regulators: Home/host supervisions communication Communication Key Success Factor Communication Communication

34. Introduction to Basel II Implementation Basel II Implementation in Thailand Next steps Agenda

35. On policy side Next Steps On Examination side

36. Q & A