The Structures of Thai Financial Institutions

Introduction

There are various kinds of financial institutions in Thailand: commercial banks, financial companies; government saving banks; insurance companies etc. In this paper, I will mainly focus on the banking sector. I will talk about the history of the central banks, how does it reform and policies it impose to other banks. Then I will see the regulations for commercial banks, the services they offer and the difference between domestic and foreign banks. Next, I will show some information about other financial institutions. At last, we will have a discussion in the future direction of the Thai banking system.

The structures of Thai financial institutions

The Thai banking sector is split roughly into three main segments: Thai-owned banks; state-owned banks--many of which are privatized; and the smaller hybrid banks, which are local banks that owned by foreign companies.

Central Bank

First, let's talk about the central bank. Thailand's central bank was first established in 1939 as the Thai National Banking Bureau. It main functions at that time were to manage the issue of government bonds, taking deposits from and lending to the Government, government agencies and commercial banks and transferring fund between the central region and the other parts of the country.

In 1942, it renamed to Bank of Thailand (BOT) and under the supervision of the Ministry of Finance (MOF). Now, the main functions of the central banks are to set up monetary policy to maintain monetary stabilize for the Thai government; print and issue notes; provide banking services to the government; manage the international reserve; be a lender of last restore to others banks and supervise financial institutions.

The central bank regulates Thai financial institutions by two aspects: onsite and offsite supervisory methods. On site visits are perform once a year to make sure each registered financial institution is physically up to standards. And Off site inspections require the banks sending the central bank reports regularly over all areas of operations. It also placed strong emphasis on preserving financial stability. Each bank or finance company must continually maintain liquid assets amounting to at least 7 percent of its total deposits. In addition, the minimum capital funds to risk assets ratio has to be abided by, and this ratio must comply with an international guideline (or that of the Bank for International Settlements) within a specific time frame.

Commercial Banks

There are 29 commercial banks in Thailand in which 15 local and 14 foreign banks. These banks have over 90 percent of assets, deposits, and loans of the commercial banking sector. Entrance by new banks was limited that lead to little competition in the banking industry. The four most important commercial banks are the Bangkok Bank, the Thai Farmer's Bank, the Krunk Thai Bank and the Siam Commercial Bank. In the 1990s, these four banks together held 67% of the banking sectors assets in which 75% of total assets in Thai banking system are in private banks.

The sources of fund of commercial are mainly from deposits, over 75% of fund. Borrowings from oversea banks and from BOT consist of the remaining. And the most common feature in HK, interbanks borrowing, is not popular in Thailand banking sector. The use of fund is in the bill account, make loans to customers and invest in the securities market.

Commercial banks provided a wide range of services. Other than the common functions: taking deposit from the individual and companies; loaning money for real estate such as mortgage; making long term and short term loan for private consumption or business activities; They also offered checking services, short-term trade credits, guarantees for third-party borrowing, foreign exchange services, and letters of credit etc. However, commercial banks are not allowed to undertake securities or trust services (Data from the year 1996).

Licenses for operation are issued by the central bank (BOT). BOT set up requirements for commercial bank to in corporate. Two types of licenses are given to domestic banks. The first one is commercial bank licenses, these banks can offer services including broking, trading and underwriting of equity securities to customers. Another one is retail bank license. These banks will offer basic services aimed at small- and medium-sized enterprises and low-income customers Thai commercial banks are required to have a certain amount in capital, banks must have the amount of reserves exceeds 60% of the bank's paid in capital They achieve this by transferring 15% of their profits into reserves and limiting dividends to 15% of reserves.

Foreign banks will be able to apply for two types of licenses as well. A foreign bank in Thailand will be either a subsidiary of a foreign bank, which can provide the same services as local commercial banks to customers and foreign banks are allowed to open one branch within Bangkok and three branches elsewhere, or it will be a full branch of a foreign bank. The basic capital need for foreign banks with operations in Thailand was required to set their tier-1 capital at 7.5% of risk-weighted assets.

The four largest foreign banks are Citibank (US), Sumitomo-Mitsui Bank, Bank of Tokyo-Mitsubishi, Mizuho Corporate Bank (all Japan) and HSBC (UK). The number of 100% foreign-owned and registered banks is 18 in 1996. There are other 21 foreign banks in 2004.

The most significant difference between foreign and local banks is the target groups they serve. Most foreign banks specialize in foreign-trade financing, usually involving firms from their native countries. The larger banks undertake local financing in addition to their international operations. While domestic banks focus on the services mentioned before.

However, foreign banks are allowed to have majority shareholdings in Thai commercial banks. These are known as "hybrid banks", and there were four of them as of February 2004. Bank of Asia, DBS Thai Danu Bank, Standard Chartered Nakornthon Bank are some examples.

Nowadays, investment banks are very popular in the world. However, investment bank is not a legal designation in Thailand. There are no strict restrictions between commercial and investment banks. Commercial banks, finance and securities companies undertake the typical activities of such financial intermediaries. The large domestic and foreign banks underwrite bond and equity issues. Foreign banks offer some investment-banking capabilities and