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The Risk Management of Commercial Banks: Thailand’s Experience

The Risk Management of Commercial Banks: Thailand’s Experience. Suchada Dejtrakul Bank of Thailand ASEAN+3 Workshop on Reform and Development of Banking Sector in China Shanghai National Accounting Institute, Shanghai, P.R. China 24-26 May 2005. Financial Institutions Performance.

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The Risk Management of Commercial Banks: Thailand’s Experience

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  1. The Risk Management of Commercial Banks:Thailand’s Experience Suchada DejtrakulBank of Thailand ASEAN+3 Workshop on Reform and Development of Banking Sector in ChinaShanghai National Accounting Institute, Shanghai, P.R. China24-26 May 2005

  2. Financial Institutions Performance Loans of Financial Institutions Non-Performing Loan (NPL) (billion baht) % % YoY

  3. Development of Risk Management in Thailand

  4. Risk Management System • The BOT assesses financial institutions risk management system in 5 areas • Strategic Risk • Credit Risk • Market Risk • Liquidity Risk • Operational Risk

  5. Supporting Factors for Risk Management. 1 Involve of the board of directors and high level management 4 2 Effective Risk Management Set up risk management system Formulate risk management policies and procedures Establish a unit to operate risk management 3

  6. Limitations to Risk Management

  7. 1. Market Risk Interest rate risk, Equity price risk, Exchange rate risk and Commodity price risk • Limitations • Not enough instruments to manage market risk • Limitation of market players and types of instruments • Market risk is complex. The understanding is limited to a small group of people • Lack of staff who are expert in both products and management => high turnover

  8. 2. Liquidity Risk • Limitations • No emergency plans to support liquidity risk or have but not well developed • Never test emergency plan

  9. 3. Credit Risk • Limitations • Lending remain concentrate in some specific areas => concentrate risk • Do not have system to assess risk • Use traditional approach to manage risk • Slow development of statistical based approach (lack of IT and data management)

  10. 4. Strategic Risk • Limitations • Have not establish a unit to manage strategic risk or set up only a committee • Assign only executives from core department to conduct strategic plan which should include support department as well • Board of director should not only approve but should participate in conducting strategic plan • Set up unrealistic goals

  11. 5. Operational Risk • Limitations • Lack of effective information systems  information disruption • No regulations or policies  delay report of defaults  delay problems solving • No self-assessment policy or survey of training need

  12. Basel II implementation Milestones

  13. Approach to calculate capital requirement under Basel II Financial Institutions are require to maintain capital funds against • Credit Risk (improved) • Market Risk (same as Basel I) • Operational Risk (additional)

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