Safeguarding financial-system stability: the BOT's legal responsibilities

Chirathep Senivongs na Ayudhya

While monetary stability is aimed at preventing financial vulnerabilities from developing into excesses, weak macroeconomic management can increase stress on the overall stability of the financial system.

This makes it important that the central bank optimise synergy in its responsibilities for safeguarding monetary and financial stability, as recognised by the new central-bank law.

Even though the new Bank of Thailand (BOT) Act empowers the central bank to ensure monetary stability and enhances its operational independence, the pursuit of financial stability makes use of three new laws.

The BOT Act sets out the roles and responsibilities of the Financial Institutions Policy Committee (FIPC) in overseeing the overall policy framework for financial stability and prescribes important ratios deemed essential to preserving the health of individual financial institutions and the stability of the whole system.

Under the Act, the FIPC is chaired by the BOT governor and consists of five outside experts and three ex-officio external members out of a total of 11 committee members.

The Act refers the specific roles of granting and revoking of business licences and the proportion of foreign ownership beyond 49 per cent to the Finance Ministry, because these decisions require considerations other than those in resolving banking problems. It also emphasises that the BOT reports to the Finance Ministry, in order to foster close communication between the two entities.

The Financial Institutions Business Act (FIBA) governs the framework and supervisory conduct of financial institutions. Another important piece of legislation is the Deposit Protection Act, which grants partial protection to small depositors while protecting taxpayers from undue fiscal burden when financial institutions fail.

The FIBA was designed to embrace the best practices of financial-institution supervision, in accordance with the Basel Core Principles (BCP).

While the BCP, particularly the consolidated supervisory framework and new capital-adequacy requirements, were already put into practice collaboratively between the BOT and commercial banks prior to FIBA, the new legal foundation is essential to ensuring full implementation and compliance of the principles.

Importantly, the FIBA empowers the BOT to oversee evolving financial conglomerates and implement prompt corrective actions to prevent potential deterioration of asset quality beyond a certain preset capital-adequacy threshold.

It also provides room for implementing macroprudential measures to safeguard against potential financial vulnerabilities early on.

Moreover, the FIBA allows the BOT more effectively to supervise some non-bank institutions that have economic influence, with the aim of enhancing consumer protection, an area in which the public would benefit directly from this new law.

Chirathep Senivongs na Ayudhya is the Bank of Thailand's division executive for external communications. The views expressed are the author's own.