This document discusses risk management of commercial banks in Thailand. It provides an overview of the development of risk management guidelines by the Bank of Thailand since 1993. It also identifies limitations faced by banks in managing different types of risks, such as credit risk, market risk, liquidity risk, strategic risk, and operational risk. The guidelines issued by the Bank of Thailand aim to strengthen banks' risk management systems, policies, oversight, assessment, reporting, controls and infrastructure. The document also outlines Basel II implementation milestones for Thai banks from 2005 to 2009.

1. 1
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

2. 2
Loans of Financial Institutions
5,395.3
5,135.5
4,251.7
4,064.6
4,757.7
4,970.3 8.6
-17.2
-11
-4.4
17.1
4.5
3,500
4,000
4,500
5,000
5,500
1999 2000 2001 2002 2003 2004
-20
-15
-10
-5
0
5
10
15
20
Loan outstanding
Loan growth
(billion baht) % YoY
38.9
17.9
10.5
15.7
12.7
10.8
0
10
20
30
40
50
1999 2000 2001 2002 2003 2004
NPL
Non-Performing Loan (NPL)
%
Financial Institution 2003 2004
Thai Banks 13 12
Foreign Branches 18 18
Stand-alone IBFs 5 4
Finance Companies 18 18
Credit foncier Companies 5 5
Total 59 57
Financial Institutions Performance

3. 3
1993 Basel I (Credit risk) was applied to financial institutions
1999 BOT’s supervision and examination of financial institutions has
focused on risk management
Sep 2002 Issued policy statements on liquidity risk management
Dec 2003 Issued the market risk supervision policy
Published risk-based examination manuals covering strategic,
credit, market, liquidity, and operational risks
Aug 2004 Issued standard template for collection of operational loss data
and supporting guidelines on operational risk management
Dec 2004 Issued a supervision policy on interest rate risk in banking book
Feb 2005 Published prudential guidelines on Internal Rating System, Credit
Scoring System, Market and Credit Risk Stress Testing, Risk
Model Validation, and Loan Portfolio Management
Development of Risk Management in Thailand

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

6. 6
Limitations to Risk Management
Limitations
Involve of the board of directors
and high level management
 Not enough cooperation
 Low qualification
 Lack of independence to make a decision
 Not transparence
Formulate risk management
policy and procedures
 Policies/ procedures not match with risks
 Underdevelopment Infrastructure
 Rigid to implement
 Communication failure
Establish a unit to operate
risk management
 Lack of adequate structure
 Staff has less experience
 Lack of independence
Set up risk management
system
 No follow up and control system
 Not enough risk assessment/ management
instruments
 Database and IT system

7. 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
Guidelines
Board of Director Approve and review risk strategies and policies
Risk assessment Have adequate risk measurement and reliable tools
Risk report Effective follow up and report
Risk control Establish risk limits

8. 8
2. Liquidity Risk
Limitations
• No emergency plans to support liquidity risk or have but not well developed
• Never test emergency plan
Guidelines
Board of Director Authorize the policy and action plan as well as
monitor the implementation
Risk control Have internal control system that can track and
monitor the liquidity risk management system
Must monitor exposure in domestic and foreign
currencies under relevant scenarios.
Risk report Set up an effective and efficient reporting system that
generates sufficient information for management to
make a decision in a timely manner

9. 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)
Guidelines
Board of Director Assign acceptable risk limit
Risk assessment Develop model to assess risk (statistic, expert opinion)
Assess risk amount and component (sensitivity
analysis, stress test)
Risk report Risk analysis and report, have early warning indicators
Risk control Internal control and examination

10. 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
Guidelines
Board of Director Have experience, responsibility and good governance
Risk assessment Strategic plan in line with FI’s main objective
Risk report Have independence unit to assess and report risk
Precise and up to date data and support decision
making

11. 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. 12
Year Description
2005 Issue series of consultative papers, conduct industry
hearing and finalize the Basel II framework
June 2006 Banks to submit Basel II implementation plans for
approval
Year end 2007 Begin Parallel calculation of Basel I & Basel II
(one year for simple approaches, two for advanced)
Year end 2008  Begin new Basel II capital charge (SA, FIRB)
 Continue parallel calculation (AIRB, AMA)
Year end 2009 Begin new Basel II capital charge (AIRB, AMA)
Basel II implementation Milestones

13. 13
Approach to calculate capital requirement
under Basel II
Credit Risk 1. Standardised Approach
2. Internal Ratings-Based Approach
2.1 Foundation Internal Ratings-Based Approach
2.2 Advanced Internal Ratings-Based Approach
Market Risk 1. Standardised approach
2. Internal model approach
3. Mixed approach between standardised and internal approaches
Operational
Risk
1. Basic Indicator Approach
2. Standardised Approach
3. Advanced Measurement Approach
Financial Institutions are require to maintain capital funds against
 Credit Risk (improved)
 Market Risk (same as Basel I)
 Operational Risk (additional)