Fitch Ratings (Thailand), subsidiayr of UK-based Fitch Ibca, today (27 Sep) hosted its annual conference in Bangkok, focusing on key issues and developments within the Thai financial system and capital markets, including impact of Basel II, value of fund ratings for investors, as well as trends in infrastructure and local government ratings.
Fitch was delighted to welcome Deputy Governor of the Bank of Thailand, Dr. Tarisa Watanagase, who provided the opening address at the conference on the impact and suitability of Basel II for Thailand. Fitch Ratings' head of financial institutions for Asia, Mr. David Marshall, also spoke on the implications of Basel II for Thai banks, who noted that efforts by Thai banks to comply with Basel II should contribute to upgrading their risk management capability.
At the same time, however, the agency cautioned that banks planning to move to the more sophisticated IRB (Internal Ratings Based) Approach need to ensure that they are able to accurately estimate potential credit losses since this will ultimately determine the amount of capital they need to hold. Fitch said underestimating credit losses could lead banks to being undercapitalised, especially during economic downturns when losses are likely to be high. According to Mr. Marshall this highlights the need for banks on the IRB Approach to assess risks throughout a complete economic cycle and not just rate their borrowers on a "Point-in-Time" basis.
"Fitch Ratings believes that national regulators will have a key role to play in ensuring that banks are adequately prepared before they move to IRB. For banks that choose to follow the standardised approach Fitch urges banks and supervisors to consider whether the Basel II guidelines are conservative enough for Thailand, for example the 35 percent risk weighting assigned to residential mortgage loans and the 75 percent risk weight resulting in a 6 percent charge for credit risk on other retail lending, including credit cards," said Mr. Marshall.
He also warned that Thai banks choosing the Standardised approach need to ensure they do not take on a disproportionate share of the higher risk credits that may be shunned by the more risk-sensitive banks that follow the IRB approach. Fitch is concerned that this may occur as one result of Basel II may be a migration of high risk assets from IRB to Standardised banks.
Mr. Vincent Milton, managing director of Fitch's Bangkok office, who moderated a panel discussion on Basel II during the conference, added that Basel II may encourage a further shift towards retail banking in Thailand. The development of better data and risk management systems including a credit bureau and credit scoring models together with improved disclosure should assist the management of credit costs better in the longer-term, although retail, as well as corporate, banking tends to be more volatile in emerging market economies. "Thai banks should consider whether higher capital charges then implied by Basel II are required to offset these risks, which are underlined by Thailand's earlier financial system crises in the early 1980s and late 1990s," said Mr. Milton.
In the second session, Mr. William Streeter, Fitch's head of public finance for Asia, speaking on trends in infrastructure and local government ratings, said that decentralisation efforts in Thailand are at an early but important stage. "Thailand now has a good legal framework for local governments to assume more authority, and interest by a number of local governments, including the Bangkok Metropolitan Administration to access the bond market on its own. Within the region and throughout the emerging market countries, there are valuable role models of decentralisation and infrastructure finance that Thailand can draw upon."
Fitch recently assigned Thailand's first bond fund rating to AJF Cash Management Fund. At the conference, Mr. Lertchai Kochareonrattanakul, Fitch's Associate Director for Corporates/Funds outlined the value of bond fund ratings to investors and how these help investors assess risks associated with bond funds. "Fitch believes that credit ratings alone do not reflect all the underlying risks in bond fund portfolios, such as interest rate, liquidity and spread risks. In a rising interest rate environment such as the present, Fitch's volatility ratings should help investors better understand market risks."
Fitch was delighted to welcome Deputy Governor of the Bank of Thailand, Dr. Tarisa Watanagase, who provided the opening address at the conference on the impact and suitability of Basel II for Thailand. Fitch Ratings' head of financial institutions for Asia, Mr. David Marshall, also spoke on the implications of Basel II for Thai banks, who noted that efforts by Thai banks to comply with Basel II should contribute to upgrading their risk management capability.
At the same time, however, the agency cautioned that banks planning to move to the more sophisticated IRB (Internal Ratings Based) Approach need to ensure that they are able to accurately estimate potential credit losses since this will ultimately determine the amount of capital they need to hold. Fitch said underestimating credit losses could lead banks to being undercapitalised, especially during economic downturns when losses are likely to be high. According to Mr. Marshall this highlights the need for banks on the IRB Approach to assess risks throughout a complete economic cycle and not just rate their borrowers on a "Point-in-Time" basis.
"Fitch Ratings believes that national regulators will have a key role to play in ensuring that banks are adequately prepared before they move to IRB. For banks that choose to follow the standardised approach Fitch urges banks and supervisors to consider whether the Basel II guidelines are conservative enough for Thailand, for example the 35 percent risk weighting assigned to residential mortgage loans and the 75 percent risk weight resulting in a 6 percent charge for credit risk on other retail lending, including credit cards," said Mr. Marshall.
He also warned that Thai banks choosing the Standardised approach need to ensure they do not take on a disproportionate share of the higher risk credits that may be shunned by the more risk-sensitive banks that follow the IRB approach. Fitch is concerned that this may occur as one result of Basel II may be a migration of high risk assets from IRB to Standardised banks.
Mr. Vincent Milton, managing director of Fitch's Bangkok office, who moderated a panel discussion on Basel II during the conference, added that Basel II may encourage a further shift towards retail banking in Thailand. The development of better data and risk management systems including a credit bureau and credit scoring models together with improved disclosure should assist the management of credit costs better in the longer-term, although retail, as well as corporate, banking tends to be more volatile in emerging market economies. "Thai banks should consider whether higher capital charges then implied by Basel II are required to offset these risks, which are underlined by Thailand's earlier financial system crises in the early 1980s and late 1990s," said Mr. Milton.
In the second session, Mr. William Streeter, Fitch's head of public finance for Asia, speaking on trends in infrastructure and local government ratings, said that decentralisation efforts in Thailand are at an early but important stage. "Thailand now has a good legal framework for local governments to assume more authority, and interest by a number of local governments, including the Bangkok Metropolitan Administration to access the bond market on its own. Within the region and throughout the emerging market countries, there are valuable role models of decentralisation and infrastructure finance that Thailand can draw upon."
Fitch recently assigned Thailand's first bond fund rating to AJF Cash Management Fund. At the conference, Mr. Lertchai Kochareonrattanakul, Fitch's Associate Director for Corporates/Funds outlined the value of bond fund ratings to investors and how these help investors assess risks associated with bond funds. "Fitch believes that credit ratings alone do not reflect all the underlying risks in bond fund portfolios, such as interest rate, liquidity and spread risks. In a rising interest rate environment such as the present, Fitch's volatility ratings should help investors better understand market risks."