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Published on August 10, 2007

The CDOs represent only 0.6 per cent of their assets.

Only one bank, BankThai, has any exposure to subprime loans and the rest have put their money in performing CDOs, deputy central bank governor Bandid Nijathaworn said.

BankThai's investment in sub-prime loans represents only 0.1 per cent of these four banks' assets. However, banks need to take a cautious look at the global market, which is likely to be volatile, he said.

"Banks should strictly focus on risk management because global volatility will be prolonged, while domestic non-performing loans will be growing," he said.

The central bank has allowed banks to own CDOs since late 2004, aiming at promoting additional investment channels and new financial instruments.

Nawaron Dejsuvan, an officer of the central bank's supervision group, said the central bank's permission took into account risk management. Any banks interested in CDOs have to acquire a good risk-management system. They must monitor the market and related investment risks and report their investments to the central bank regularly.

According to new accounting standards and conservative practice, banks must set aside provisions for possible losses if asset prices fall, he added.

Earlier, BankThai president Phirasilp Subhapholsiri said his bank invested $400 million in 14 CDOs, of which $50 million - or 0.68 per cent of its total assets - were sub-prime. The bank has already provisioned Bt276 million in the second quarter to cover those investments.

Assistant governor Samart Buranawatanachoke said the banking system had built up a capital adequacy ratio of 13-14 per cent, better than the mandatory minimum of 8.5 per cent.

"They could keep adding to reserves if they have to do [to cover losses from CDOs]," he said.

Banks are required to mark their investments to market to reflect profit and loss on an active basis. Changes in value would affect capital in both negative and positive ways. Losses would push up expenses, which could weaken capital, and then banks would have to beef up their reserves, he said.

Senior director Tongurai Limpiti insisted that no more measures were needed to ward off impacts from the banks' investment abroad, as the central bank's supervision was already prudent enough.

Banks were allowed to include CDOs in their portfolios to sharpen their investment skills under financial liberalisation, she said.

The sub-prime squeeze would not spill over to prime CDOs and the market would settle down in the near future, said Phurichai Rungcharoenkitkul, an investment officer of the central bank.

The American economy remained good in good shape and the US policy interest rate would drop more rapidly than expected.

Anoma Srisukkasem

The Nation