Banks asked to bolster stress tests despite high loss provisions

Economy July 27, 2013 00:00

By Sarun Kijvasin
The Nation

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Inclusion of new risks arising in US, China and domestic issues urged in annual evaluations

Despite their high loan-loss provisions, the Bank of Thailand has asked banks to include in their stress tests consideration of the US Federal Reserve’s likely reduction of its stimulus and the expected slowdowns of the Chinese and Thai economies.
Krirk Vanikkul, BOT deputy governor for financial-institution stability, said the commercial banks had set relatively high provisions for doubtful debts, particularly in the second quarter of this year, as part of their prudent operations. 
However, the central bank has asked them to include the new risks arising in the United States, China and Thailand itself in their stress tests, which are done on a yearly basis, said Salinee Wangtal, BOT assistant governor for the Supervision Group. 
“Doing stress tests doesn’t mean that they see higher risks in the future. We have to do stress tests every year to see how risks in each period could affect investment and credit portfolios,” she said.
At present, Thai commercial banks run their operations with prudence, as reflected by Moody’s Investors Service’s comments on their high provisions. 
Krirk said: “Banks set provisions to prevent damages that may arise as they are uncertain what will happen in the latter half of the year.”
The commercial banks currently set provisions of 150 per cent, higher than the BOT’s requirement of 100 per cent. 
The banks are required to meet two standards, the Bank for International Settlements’ requirement of a capital-adequacy ratio at no less than 8.5 per cent of risk assets, and provisions for doubtful debts. Thai commercial banks’ capital-adequacy ratio currently averages 16 per cent.
“The question is, what is such a level of provisions for? It’s for banks to be capable of managing themselves when there are damages to their assets. If problems [become] more severe, banks have this vaccine as a preventive measure,” Krirk said.
At the end of June, commercial banks’ non-performing loans remained steady at 2.2 per cent of total loans.