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Published on October 5, 2007

The opportunity for banks to use fiscal and monetary tools to develop financial markets might be limited if the Bank of Thailand uses overly cautious measures to avoid financial risk in response to the US mortgage crisis, a leading banker warned yesterday.

The central bank's attitude towards new financial products might be too conservative, Kasikornbank president Prasarn Trairatvorakul told the Bank of Thailand's (BOT) annual symposium.

New financial products have advantages, such as those dealing with securitisation, which lets banks reduce risk concentration on their balance sheets, he said at a time when the credit crunch in the United States is still raging.

Besides, bankers on Wednesday criticised the harsh treatment facing them in the BOT-sponsored bills before the National Legislative Assembly.

Prasarn said that although the sub-prime credit crisis in the US was related to collateralised debt obligations (CDOs) - a type of asset-backed security and structured credit product - CDOs in general were financial innovations. The product itself did not cause the crisis.

Narongchai Akrasanee, a former commerce minister, said that if the central bank was too risk-averse with its policies, it might not give enough room for the industry to manoeuvre.

Atchana Waiquamdee, a BOT deputy governor, appeared to take a dim view of banks subcontracting their lending, saying they should know best about their customers' credit standing.

She argued that commercial banks could reduce risks on their balance sheets by selling loans to investors via securitisation, but this financial paper would eventually find its way back to their balance sheets. The banks would carry the risk anyway, she said during the seminar on "Managing Financial Risks for the Coming Decade" hosted by the central bank.

"Banks should not outsource credit analysis to outsiders," she added.

Prasarn said it appeared safe for banks to approve loans to large firms such as Charoen Pokphand or Siam Cement. But when there is risk concentration, then banks need to diversify risks to other investors. Long-term loans are also associated with higher risk for banks.

In the bigger picture, risk means "dare" and it has driven world economic growth for centuries, yet it also creates turbulence from time to time, he added.

Pisit Lee-atham, a former deputy finance minister, said the positive side of the sub-prime system in the US was that it allows lower-income groups to access credit via the market mechanism. In Thailand's case, financial institutions owned by the government have assumed the role of providing loans to low-income earners, supported by taxpayers' money. Financial innovations are needed here to provide credit to lower-income groups.

Pisit thinks that the shocks from the sub-prime market meltdown in the US have not yet died down.

He also expressed concern about the economic situation this year. The government might be sending a wrong signal about the economy recovering by showing an overly optimistic picture. This is despite the fact that consumption and investment and public spending have not expanded.

Supavud Saicheau, managing director of Phatra Securities, said the world economy might face an era of high inflation and recession after the sub-prime crisis. In the next few years it will become clear how the global imbalance - the twin deficits in the US and high current-account surpluses - will correct itself: through a soft landing or otherwise.

Atchana conceded that the central bank faced more challenges in implementing policy. It cannot look only at price stability but also has to consider financial stability. Market participants often are too bullish during periods of high growth. This creates greater risk later, she said.

It is, therefore, hard for the central bank to convince the market that rates must be raised during inflation. But it is necessary because the central bank has to pre-empt financial instability, in case an asset-price bubble gathers momentum, she added.

Wichit Chaitrong

 The Nation