BASEL iii: A need for Thai Banks and the increase of Capital level

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Jaydee Wongwatthanaroj

BASEL iii: A need for Thai Banks and

the increase of Capital level

Business Administration

Master’s Thesis

30 ECTS

Term : Spring 2012

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Acknowledgement

I would like to firstly thank to my supervisor, Dan Nordin (Ph.D.), for the provided suggestions and guidances, as well as other professors in Karlstad University, whose advice and comments stimulate the multiple ideas on this paper. I wish to say special thanks to financial stuffs working on Bank of Thailand for providing the useful recommendation and information. Last but not least, I would like to thank to all of my friends and family who always kindly give me the encouragement, cheerful support and consultation on my paper. This thesis would have not been finished without you guys. Lastly, the gratitude goes to Karlstad University for giving me the great opportunity to study the various knowledgeable courses. Thanks for the wonderful experiences in Sweden.

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Abstract

The international banking regulation is known as “Basel” firstly released in 1988 to sound the banks. It has been improved for two versions, and now is called “Basel iii regulation”. This regulation ensures the soundness of the banks by focusing on the increase of capital level. Yet, it comes with several draw backs, especially with the decrease of banking profitability. The regulation is, of course, worth implementing on the banks attending in the high risk financial transaction, but How about the banks taking in the lower risk? Like the banks in emerging countries.

Therefore, the purpose of this paper is to find out if the banks in emerging countries really need this regulation or not. This paper takes different banks in Thailand, which are Bangkok Bank, Siam Commercial Bank, KrungThai Bank, Bank of Ayudhya and Kasikorn Bank as the case study. Furthermore, I extend the study to see the effect for the increase of capital level in term of lending spread on Thai banks in order to maintain Return on Equity (ROE). The research has been analyzed by introducing the Thai current banking situation from 2009 -2011 as the finding. These are compared and discussed with the pillars of Basel iii regulation, which has been divided into new minimum capital level, leverage ratio and liquidity standard, and also calculated to see the lending spread effect via the equations provided by Bank for International Settlements (BIS).

Finally, the result shows that Thai banks hold low-risk financial instruments and also have a high level of capital. Thus, there is no need for Thai banks to adopt all main regulations from Basel iii. Only leverage ratio that Thai banks should consider. For the lending spread, it is found that 0.83% lending spread of total asset value needs to be increased in order to maintain the profitability, from increasing 1% in capital level.

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List of Abbreviations

ASF Available amount of Stable Funding

BAY Bank of Ayudhya

BBL Bangkok Bank

BCBS Basel Committee on Banking Supervision

BIA Basic Indicator Approach

BIS Bank for International Settlements

BOT Bank of Thailand

CCF Credit Conversion Factor

CDOs Collateral Debt Obligations

CET1 Common Equity Tier1

EAD Exposure At Default

ECAIs External Credit Assessment Institutions

EU European Union

KBANK Kasikorn Bank

KTB KrungThai Bank

LCR Liquidity Conversion Ratio

LGD Loss Given Default

NPL Non-Performing Loan

NSFR Net Stable Funding Ratio

OBS Off balance sheet

PD Probability of Default

QIS Quantitative Impact Study

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RWA Risk-Weighted Assets

SA Standard Approach

SCB Siam Commercial Bank

SIFIs Systemically Important Financial Institutions

SPV Special Purpose Vehicles

TCR Total Capital Ratio

TSR Target Standard Ratio

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Chapter 1: Introductions

This chapter consists of three different parts, aiming to provide how the research questions have been contributed and the purpose of this study. The first part is Research Background that contains of general idea and the historical overview of Basel regulation as well as the link to how the questions have been developed. Second are the purpose and research questions of this study. Lastly it ends with how this study is organized on Thesis organization.

1.1 Research Background

Banks and financial institutions are one of the important roles in the economics system. They give an access of financial transactions for people and corporations that have purposes into the particular productive activities. Consequently, this leads to the expansion of economics (Rabiul 2010). For this reason, to reduce the risk of their failure that could happen from the inability to meet demanded obligations, and to maintain the stakeholders’ trust, there is need for regulations to supervise them. Bank regulation comes from the concern of creditors, mostly from depositors, related to the risk on the lending side to meet their obligation (Watanabe 2011).

There are several regulations aiming to sound the risk banks taking, for instance, Solvency ii, Capital Requirement Directives, etc. However, this paper focuses on the regulation called “Basel Regulation”. It has been developed by The Basel Committee on Banking Supervision (BCBS). Basel i, the first version of the framework was released in 1988, and pays attention on the capital adequacy level of the banks. Capital is the quality assets banks need to save to buffer the unexpected risk (Drumond 2009).

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2 financial crisis. This version improved the way to do risk assessment to be deeper and clearer, and expanded the covers for all relevant risk as well as the inclusion of incorporate regulations (Docherty 2008). Unfortunately, Basel ii has become a huge issue after the systematical failure of banks and financial institutions from global financial crisis in 2008. Many researches show that the framework of Basel ii is not enough and has various flaws to assess the risk due to several reasons, for example, the troubling with calculating capital requirement, the liquidity asset is not enough, etc (Rosato 2011). So, in December 2010, BCBS has released Basel iii aiming to fix the flaws of the previous Basel and higher the resilience of financial system. The latest framework increases the level of capital requirement as well as higher the proportion of reliable assets. Furthermore, it adds two more standards to ensure the liquidity of the asset, which is leverage and liquidity ratio (Walker 2011). The implement of Basel iii will be gradually applied on banks and financial institutions, starting from 2013, until it will be fully implemented in 2019 (Bank for International Settlements [BIS] 2011A). More detail of implementation timeline shows in APENDIX A. Due to the challenges of each Bank from different countries and regions, some have decided to apply Basel iii in their own way, meaning that they adjust some small details with their own regulations simultaneously whereas, in some countries, for example EU (European Union), Basel iii is seamlessly applied because of the long-term consistency with Basel ii (Chabanel 2011). Yet, the coin always has two sides. Basel iii comes with several criticisms for example; weaker banks might find itself in the tough situation from raising more capital, it takes huge cost to implement, etc (KPMG 2010). The distinctive criticism is the significant pressure on profit and ROE. In December 2010, the result of Quantitative Study Impact (QIS)i shows that after implementing Basel iii, Group 1 Banks need the additional capital estimated to be more than €577 billion, and Group 2ii needs about €25 billion to meet the requirement. This estimation is not even included the cost of skilled employees, new strategies and so on (BIS 2010A).

Of course, this framework is worth implementing in the countries with the highly complicated financial transaction like in US, Japan, or UK, which normally comes with high return rates. What about in the countries that holds less complicated financial instrument or emerging markets? Smith (2012) and Borak (2011) say Basel iii is not suitable with the emerging markets because the need for additional capital

i

QIS is a study conducted by BCBS in order to assess the impact from new requirement related to the capital base.

ii

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3 requirement could impede the viable economic growth. Santos (2011) argues that the financial condition of emerging markets already started to face the more and more volatile risk in the market due to the upcoming investors. But, Euroweek (2011) debates even though emerging markets have higher risk, it is insignificant comparing to the needs for the growth of GDP to meet with the population demand and could damage the financial market. Roger and Vitek (2012) clarifies that Banks can raise capitals from different ways, but they have a tendency to widen the lending spread to gain more capital rather than decrease the amount of lending or issue new equities. These processes eventually lower the economic activities.

Therefore, in this paper, I have chosen banking sector in the emerging markets to study if they really need to implement Basel iii or not. Moreover, I extend my studies to estimate the impact of increasing the capital level in terms of lending spread on the focal banks. Thai banks have been chosen as the focal case. Thailand is considered as one of the important emerging markets in Asia which is currently in the process of studying the potential to adopt Basel iii framework (Mellor & Suwannakij 2012). The Thai banks’ study of implementing Basel iii aims to gain trust from both investors and customers. It is also stimulated by the preparation to be part of Association of South East Asia Nations (ASEANiii) in 2015 as Thailand is anticipated as the main distribution center on this region (Sirisophonsin 2009).

1.2 Purposes and Aims

This paper aims to attend the preliminary investigation on the banking sector in Thailand to study if there is a need to adopt the pillar requirements from Basel iii framework. These requirements mainly consist of new capital level, leverage ratio and liquidity standards, which will be further explained on this paper. Moreover, the aim is extended to study the impact on the Thai banks’ profitability from the increase of capital level.

iii

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4 Research Questions

1. Is there a need for Thai banks to adopt Basel iii regulations? In what extent? 2. The impact to Thai banks from strengthening capital level in terms of lending

spreads to maintain the profitability (ROE)?

1.3. Thesis organization

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Chapter 2: Research methodology

This chapter provides how the research is conducted in order to answer the research questions.

This consists of Research design showing the method the researcher uses to conduct the

research, Data collection illustrating how the data is gathered as well as the limitation and

reliability of this paper.

Research refers to the art of reliable scientific investigation to define the answer for the particular question or improve the theory by relying on the related information in any fields (Cooper & Emily 1995; Kothari 2004). The purpose covers the search for the insight that is hidden under the information or characteristic and relationship between the variables (Kothari 2004). There are many types of the research, depending on its purpose and the way to conduct the information. This thesis is the business research, which is the systemic process, involving in the planning, acquiring, analyzing and disseminating the data, in order to guide the managerial decision of the organization (Sachdeva 2009).

2.1 Research Design

2.1.1 Research Strategy

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6 Mostly it is used in case study involved, and emphasizing on document more than quantifiable data (Alan B. & Emma B 2007).

This thesis tries to understand the relationship and the aspects that influence the implementation of Basel iii regulation and to find out the consequence of increasing the capital level, which leads to the answer of the research question. Moreover, the data is collected by the reliable documents. These are consistent to the qualitative method. Therefore, qualitative method is adopted in this thesis.

2.1.2 Research Approach

Deductive approaches are the way to analyze data, beginning with the insight from theories and generalization, then, seek for the related data by collecting the information from the particular instances (Cresswell 2009).

This thesis adopts the deductive approach. This is because it starts with the understanding of the overview Basel iii regulation and the financial model of the impact of increasing the capital level, which are the focused theoretical part of this research. Then the research question is emerged based on the mentioned theories. After that the data collection is conducted by using a case study of the financial situation of Thai commercial banks, and then is connected with the theory to analyze the finding.

2.1.3 Case study method

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7 Basel iii on this study has supported the idea of case study method because it is currently on the process of development, which can be considered as the new area of study, and the study also intend to explore the relationship of Basel iii framework that logically affects to the Banks in Thailand. This relationship is divided into two aspects. First is from the different standards that requires Thai banks to implement, and Secondly, the link between the capital level to the lending spread of Thai banks is studied. This paper applies Thai banks as case study, focusing on the financial situation of Thai commercial banks. It is the Basel iii-related financial performance and transaction of the particular banks. Five highest assets’ Thai banks have been selected to study because it is the significant factors that can clearly show the effect of Basel iii implementation. The need to implement pillars of Basel iii as well as the impact to the lending spread of these banks after the increase of capital level is aimed to the study. The chosen banks are Bangkok Bank, Krung Thai Bank, Siam Commercial Bank, Kasikorn Bank and Bank of Ayudhya.

2.2 Data Collection

2.2.1 Primary Data

Cresswell (2009) explains Primary data is the data that is directly collected from the original sources. The data is mainly intended to use as the particular information to answer the research question. The way to gather primary data can be conducted by the multiple methods, for example, the in-dept interviews, questionnaires, the targeted documents or papers (Bryman & Bell 2007). In this paper, the document analysis is used as the way to collect the data and answer the particular research question.

A. Document Analysis

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2.2.1 Secondary Data

Secondary data is the existing information, indirectly gathered from the sources, which can be said it is not collected or investigated by the researcher, but from other sources (Sachdeva 2009). Cresswell (2009) has divided the sources into two categories that are internal and external sources. . Internal sources are the data gathered from the research-focused organization or case, for instance, the organizations, companies, etc. For external sources, it is data issuing from outsources. This could be journals, news, books and so on.

The secondary data gathered on this thesis mostly come from online sources. The data of the theoretical part is mostly from Bank for International Settlements, which are the Basel III regulations and the measurement of capital changes. The other information is mostly from scientific journals that are found on Karlstad University database, for instance, Business Source Premiere, Emerald and etc. Some are derived from the web search engines like Google and Blink. The key words used on the search are mostly “Basel iii”, “Basel regulations”, “Capital level”, “Banking management”, “Financial crisis”, “Financial risk”, “Bank of Thailand”, “risk weight assets”, “leverage level”, “Banking liquidity”, “Banking equity”, “Thai commercial banks” and so forth.

Kothari (2004) says the research process starts with the careful defining of the problems, reviewing the concepts of the theories and previous findings to have the insight of the particular phenomenon. After that the design research, as well as the data collection, is conducted. Lastly, the data is analyzed based on the theories, and subsequently interpreted into the final report. The data analyzed on this thesis is the case study analysis, which needs to be consistent and applicable on the theories.

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9 compared with the Basel iii regulation, which divided to capital level, leverage ratio and liquidity standards. This comparison is discussed to see the need for Thai banks to adopt the pillars from Basel iii. For second method, the focus of the findings turns to financial statements from different banks, and is brought into the equations provided in the theory about the impact from capital level measure to answer the latter question.

2.3 Data Limitation

The data limitation is concluded into three aspects. First is there are some detailed regulations from Basel III framework is still in the development process. Secondly, most of the information comes from individual banks, so there are some data that is confidential and need the management level’s approval to access. Furthermore, for these reasons, the interview is not able to conduct. The author had on the process to reach the management level on each representative bank as well as Bank of Thailand for the interview, but due to the authorization and inconsistent time problems, there was no response from them. Third is from the different ways of banks to provide the detailed information. Thus, with the same type of data, some are found in one bank, and are unable be found in others. Furthermore, because of the data, in the empirical parts, mainly derived from the bank’s financial statements, the biased data might be slightly appeared.

2.4 Reliability and Validity

Reliability and Validity are defined in the term of trustworthiness, precise and quality in qualitative research (Golafshani 2003). Eliminating the bias and increasing the trustfulness of the researcher are the way to make the research more reliable and valid (Golafshani 2003). This can be achieved by applying the triangulation, which is a credible guidance, emphasizing on collecting the data from multiple sources in the research (Bryman & Bell 2007). The researcher can also clearly state how the data is gathered as well as the method to analyze it (Bryman & Bell 2007).

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10 information from Bank of Thailand. These are approved by the Government of Thailand and reliable international auditing companies, for instance, Pricewaterhousecoopers, Deloitte, KPMG and Ernst & Young.

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Chapter 3: Literature Reviews

This chapter provides all the comprehensive backgrounds that are needed to illustrate in order to have a clear understanding of the theoretical framework. This chapter overviews the significant parts of Banks’ Balance sheet, which are Liabilities, Equities, Assets and Off balance sheet (OBS). Another is the relation and meaning of Liquidity, Assets, Liabilities and Capital, explained in Bank management topic. The chapter also provides the summary of financial risk related to Basel iii that includes Credit risk, Market risk, Operational risk and Systemic risk. Finally, it summarizes the main concepts of Basel i and Basel ii as well as, Global financial crisis in 2007 that is one of the significant reasons to the development of Basel iii framework.

3.1 Balance Sheet of Banks

Before going with the balance sheet of Banks, it is more comprehensive to begin with the pillar of regular balance sheet.

Balance sheet shows a snapshot of the organizations’ financial situation at the particular time. According to Figure 1, it is divided into two sides. The left side represents what they use their fund with, while the right one is how they raise the fund. Assets are the list of properties, cash, other equipment and investments. Liabilities are the organization’s obligation that is mostly debt. From (1), the difference is equity which is new worth (Berk & Demarzo 2009).

The balance sheet identity: Assets = Liabilities + Equity (1)

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12 For the banks, the structure and ideas of balance sheet are the same, but there are some detail differences in the bank identity. Loans are the bank’s significant assets, and the primary liabilities are the customer deposit. Banks make profit by being funded from liabilities and equities then using these funds to issue the loans or get the securities. So, the spread from cost of fund, and lending rate are their profit (Douglas et al. 1986). The more detail of banks’ Assets, Liabilities and Equity will be more explained in 3.1.1 and 3.1.2.

3.1.1 Assets

As mentioned above, assets are what the fund is used with. The asset held by banks can be broadly divided into two types, earning asset and non-earning assets. The proportions of non-earning assets are always higher than the desired level (Leonall & Albert 1969). Koch and Macdonald (2009) have provided the principal bank asset account. The account includes Cash as well as the reserve to prevent loss and deposit to the central banks, Loans that is the primary earning assets, lease to the customers, other fixed and intangible assets, and different types of investments. Most of the bank investment is securities that widely consist of debt securities, equity securities and derivative contracts. Rose (2001) have clarified that debt securities are eligible debts banks own to other counterparties, such as bonds, Treasury bills and speculated banknotes. Equity securities are the share banks hold in another banks, company or partnership, which are in the form of capital stocks. Derivatives are the contract that states the concurrent conditions and payments, directly relying on the particular values. The values could be rice, gold prices, foreign exchanges or interest rate. The derivatives can be separated into 5 types, based on the detail in each contract, that are Futures, Forwards, Swaps, Options and Warrants.

3.1.2 Liabilities and Equity.

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13 saving deposit. It is an account that people are allowed to withdraw only in the determined period with interest bearing. Debt is also considered to be part of liabilities. This could be the loan and securities banks make from other parties. There are short and long-term debts. These are the debt banks make within and longer than one year with the other parties. For the equity, it represents the difference between banks’ assets and liabilities. It consists of stocks contributed from the owners, and the retained earnings. The Equity usually refers to core capital, which is the last source for banks to bear the loss, and can be viewed by different quality, judging from the risk each of it takes (Rose 2001). This will be explained further.

3.1.3 Off-Balance Sheet (OBS)

OBS is the way banks conducting businesses that do not appear on the balance sheet as assets and liabilities (BIS 1986). Koch and Macdonald (2009) have explained that the meaning covers two aspects. First are the assets or liabilities, traded in the market, that are unable to meet the standards from formal exchanges, which is mostly from small companies. Secondly, it means the clams that will not appear on the balance sheet as long as it is not succeeded. This could be the gainful activities that banks attend, for instance, the act as a broker that provides an arrangement for funds with the collected fee. Another could be the promised obligation that generates the payment in the future. The latter case usually refers to the different types of promised securities.

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14 3.2 Banking Management

The basic role of Banks is to take a deposit, and turn it into loans. To gain the profit, the interest they charge on loans must not be less than the interest paying to the depositor. This spread must also cover the operational cost and the loans that are defaulted, for instance, the failure of borrowers to pay the interest (Hull 2009). In the present day, most of large banks provide both commercial and investment banking. Commercial Banking is about managing the deposit and lending transaction, while investment banking provides services related to assisting with raising capital for companies, and giving advice about financial decision (Yang 2012). This mechanism shows that there are many risks involving in banks ‘ activities, for example, the risk of borrowers not to pay as agreed or the large-amount withdrawal at the same time. Therefore, the attention is significantly needed on the management of assets and liabilities to tackle with these risks.

3.2.1 Liquidity Management

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3.2.2 Asset Management

Under the profit maximizing principle, Leonall and Albert (1969) explains that the objective of commercial banks is to gain the highest profit as possible. So, they always structure their asset to get the greatest return by increasing the proportion of earning assets along with trying to lower the risk. This is the aim of asset management. Koch and Macdonald (2009) suggest 5 basic steps to sound these assets, beginning with determining the comprehensive goal and criteria of considerable assets. Next, the forecast of related key environment, such as interest rate, inflation, must be taken into account before holding the assets. Then, banks need to have ability to assess the risk involved and liquidity of the specific assets. The last step is the need for diversification the risk, meaning that they should limit to invest in one concentrated area. Final step is to formulate strategies to manage the existing assets, such as the determination of the portfolio size to stay in the intended profitability and regulations.

3.2.3 Liability Management

As mentioned above, Liabilities are one of the sources of fund, and each source has different cost, maturity and repayment. Therefore, liability management is the way aiming to manage these sources to gain the highest profit to shareholders with the reasonable risk (Gupta & Jain 2004). They continue saying that it is to ensure the supply of funds in order to be liquid, and maintain the earning asset in the long term.

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3.2.4 Capital Management

Capital is the amount banks can bear against the losses to ensure its survival, meaning that it is the absorption of losses from different risk. These risks will be clarified in the next section, 3.3. Thus, capital management has become the legal requirement for present banks in the world (Francis & Osborne 2012). This leads to the questions, which is “how much capital banks should hold”. Hempel and Simonson (1999) have mentioned that there are three main factors influencing this amount. First is the function for each bank. Banks that conduct the financial transaction with the higher risk, of course, need more level of capital than low-risk banks. Secondly, the need for lowering the financial leverage to increase the return rate to the owners. This means, to attract and keep the shareholders, banks need to have an optimum financial leverage from level of equity, which should be small enough to generate the appropriate return rate to owners along with buffering the risk. Last is the regulation related to capital adequacy.

3.3 Financial Risks

“Risk is a measure of the probability and severity of adverse effects” (Haimes 2009). In financial way, risk is involved in the uncertainty and leads to the change in profitability and losses. Unlike most companies, for banks and financial institutions, they must be heavily regulated to prevent these risks (Rayhavan 2003). Hull (2009) says the more risks are taken, the higher return can be gained. Chen et al. (2006) supports that for this reason, they have a tendency to take excessive risk. Therefore, the understanding of each type of risk they expose and the implication from it need to be studied for Banks in order to keep these risks at optimum level (Rayhavan 2003).

3.3.1 Credit Risk

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17 2009) Thus, the aim of credit risk management is to lower the potential of this risk, and is closely consistent to the way of asset management mentioned in 3.2.2. Furthermore, to clarify the credit risk management, Rahaven (2003) defines that there are six instruments that can take out the credit risk. First is the determined ceiling that the banks can bear. This could be the limited level of loan types, for instance 10% of total fund for individual borrowers. Second, the preliminary measurement of risk can be done by using the review or scores from the approved credit agency as the references. Third is the risk rating model that is adopted by the banks. This model should clearly include various types of risk that affect the borrowers. Another is setting the loan pricing that is consistent with the expected loss, meaning that the customer with high risk should be priced high. Fifth is the diversification of risk by distributing the borrowers to different industries. The last tool is the close review of overall credit risk process should be appointed. This usually refers to the credit audit.

3.3.2 Market Risk

Hull (2009), Misra and Vishnani (2012) defines market risk as the potential of decreasing in value of bank’s off/on balance sheet due to market movements. The value is affected by the fluctuation of current exchange rate, interest rate market and commodity prices. Rahaven (2003) adds Stress testing, the predicted economic condition of the factors that have undesirable consequences, is one of the tools banks adopting to assess the market risk. He continues saying market risk has been roughly influenced from four different risks. Liquidity risk is, as mentioned in 3.2.1, the ability of turning the asset to meet the obligation at the optimal price.

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3.3.3 Operational Risk

Operational risk is known as the risk concerning about the failure of internal processes, people and external incident (BIS 2011B). Rahaven (2003) adds that this risk is mainly contributed by two factors, which is the rapid growth of both financial technology and instruments, and the systematic linkage, between them, that usually comes with the complicated regulations. The risk is concerned with the failure of the internal control and corporate governance, causing the error of performance as well as fraud and finally dropping of the profit. Thus, this can be rationally concluded that operational risk is one of the root causes and interfere with credit and market risk (BIS 2011B). Rahaven (2003) suggests that the way to mitigate this risk. He refers operational risk is hard to be measured and controlled. Banks need to focus on the procedural standard of internal audit and control, along with the shared understanding of considerable operation to the particular staffs.

3.3.4 Systemic Risk

The concept of systemic risk is defined as the risk involved in the spread failure of a number of banks to other financial intermediates (BIS 2010B). BIS (2002) explains the existence of this risk is supported by two important factors. First is the significant role of financial sector and the payment system to the growth of entire economic system. Thus, there is no room for the banks’ failure. Secondly, the financial system is fragile to the events. The events can basically refer that the trust of depositors relies on the banks to use the fund with liquid assets. Hence, it means if one depositor is unable to receive the demanded obligation or, easily say, the trust is lost, this leads to the instant withdrawal of funds. The worse scenario is that the expectation on the other banks in the financial market having the similar problems. Subsequently, the spread of financial failure happens from one bank to the entire financial system. This is usually called “Contagion”.

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19 3.4 Basel Regulation

Due to the financial risks, mentioned in 3.3, surrounding the banks, there is a need for banks to prevent these risks. Therefore, the risk regulation is developed. The main reason for the risk regulation is to mitigate the systemic risk and make sure that banks keep adequate capital on the optimum level with their risk (Apostolic et. al 2009). However, the problems arise as the understanding of capital and the way to regulate tended to be different in each country and continent. Another reason turns the increase of risk from the growth of complicated financial instrument (Hull 2009).

For these reasons, the Bank for International Settlements (BIS), one of the oldest international financial institutions, had established the Basel Committee on Banking Supervision (BCBS) in 1974 aiming to set the standard of understanding and the banking regulation in every country (BIS 2009). After a long development of the standard, in 1988, the first document was issued, which usually refers as “The 1988 BIS Accord” or “Basel i”. The objective of this accord is to set the minimum level of capital level proportionally with risk they are taking. The framework has been regularly improved due to the change of financial conditions. This goes to the issue of revised framework, Basel ii and iii released in 2004 and 2010 respectively (BIS 2009).

3.4.1 Basel i

The focus of Basel i is on the strengthening the capital level of banking system to tackle with only the credit risk and the compatibility to apply on the banks in different countries, BCBS memberiv. However, for the other risks, these are examined by the supervisors when assessing the overall capital adequacy (BIS 1998). The framework is divided into three elements, which is following.

iv

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A. Minimum Capital Level

BIS (1999) and BIS (1998) say minimum capital level is the least capital that Banks are required to hold. BCBS has given the detail in the form of equation which is present below

Target Standard Ratio (TSR): ≥ 8% (2)

The equation (2) refers that the minimum level of capital must be more than 8% comparing to the risk weighted assets. This minimum level is called Target Standard Ratio (TSR). The fraction between capital and risk weighted assets, sometimes, is known as Total Capital Ratio (TCR) (BIS 1998). This means that the bank can stand for the loss up to 8% of their risk weighted assets for the credit risk. The more detail of each element in the equation will be explained on B and C.

B. The Construction of Capital

Tier 1 and Tier 2 capital can be referred as total capital base, and is not limited for equity and retained earnings (Hull 2009). He also says Tier 1 Capital represents equity capital, which is usually known as core capital. Equity capital consisted of the fully paid common stock as well as perpetual preferred stock and after-tax earnings. BIS (1998) adds at least 50% of the total capital base is in the form of equity capital. For Tier 2 Capital, sometimes called supplementary capital, the elements are hard to interpret due to the different legal and accounting standard in each member, and consist of kinds of reserve to cover the loss, such as undisclosed or revaluation reserve. The other type of element is the different kinds of hybrid securities, which is the financial instrument that combines the characteristic of both debt and equity. It also includes subordinated debt, with a maturity more than five years, banks holding.

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21 Risk-weighted assets are the assets that market’s value has been adjusted to reflect the risk they take. This is done by the multiple of assets’ value and the risk weight determined by BSBC. The more risk the asset takes, the higher the risk weight is (Bessis 2010). BCBS has included the total assets from both on and off-balance sheet, and each asset is weighted by different categories of risk (Bessis 2010). There are five level of risk weight, which is 0, 10, 20, 50 and 100%. Each weight represents the level of exposure to the risk or, easily explanation, the risk of the counterparty failure from credit risk. 0% means riskless. It is composed of cash reserves, the loan that the counterparties are central banks and government. For the highest risk, 100%, it is the other claims such as corporate debt and bond from low reliable countries, private sectors, plant and equipment (BIS 1998). Hull (2009) clarifies the risk-weighted assets are, therefore, calculated by the multiple between assets’ market value and the risk weight. For the OBS, the assets need to be converted by factors from the BCBS to include the equal credit risk before calculating by the same method.

D. The drawbacks of Basel i

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3.4.2 Basel ii

In order to deal with the mentioned criticisms and the banking crisis in 1990s, Basel ii, the revised version of Basel Accord, was released in 2004. It provides sets of new regulations to increase the risk sensitivity by the inclusion of market and operational risk. The framework covers capital charges, expansion of the scope with the deeper calculation of the risk-weighted assets. Besides, the new ways of measurement and supervision are included. The new accord comprises of three pillars. These are following (Bessis 2010).

A. Pillar i: Minimum capital requirements

Although the calculation of the minimum capital requirement has been improved in order to cope with the mentioned criticisms, the main idea of it still exists. The remaining idea includes the 8% of TSR, and the definition of Tier1 and Tier2 Capital as mentioned in B on 3.4.1. However, there are some differences, which is the inclusion of market and operational risk they are exposed to in the equation. Another is the addition of Tier1 Capital to Risk- weighted assets ratio. The ratio should be exceeded 4.25%. These can be shown by the following equation (BIS 2006B).

Target Standard Ratio (TSR):

≥ 8% (3)

Tier1 Capital to Risk-weighted assets ratio:

≥4.25 % (4)

Moreover, another difference is banks are able to discretionally choose the way to calculate the risk-weighted assets from each risk. The calculation of the risks is briefly described by the following.

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23 categories from BCBS, the risk weight relies on the external credit assessment institutions (ECAIs), such as, Standard & Poor’s. Each rating level represents the categories of risk which are not the same for claims on sovereigns, banks, non-banks, and it ranks from0-150% (Balin 2008). Alternatively, BIS (2006B) says the second approach is the allowance for banks to develop their own method internally with the help from regulators. It is believed that the internal development model can reflect more risk sensitive and precision. Risk weighting of IRB relies on the measurement from four components, Probability of default (PD), Exposure at default (EAD), Loss given default (LGD) and Credit conversion factor (CCF) BIS (2006B). Furthermore, IRB banks adopting can be conducted by two methods. One is the foundation IRB, which banks are discretionary able to develop the model only for PD. The other components go to the estimation from the regulators. Differently, in the advanced way, all four components are estimated by banks BIS (2006B).

Another risk added is Operational risk. Hull (2009) and Apostolic et. al (2009) says there are three choices to conduct. First is Basic indicator approach (BIA), stating that capital requirement from this risk is set at 15% of the gross income. Second is Standardized Approach, which is similar with BIA, but it determines the percentage of requirement according to the particular asset’s gross income. The last method is Advanced Measurement Approach. It allows banks to calculate their own reserve from operational risk, yet the final result needs to be approved by the Basel regulators.

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24

B. Pillar ii: Supervisor Review Process

Bessis (2010) states the aims of pillar ii are to emphasis the needs to have regulator interaction, and extend the right for banks to have their own process of assessing the capacity adequacy consistent with the risk taking and strategy. BCBS says giving the authority for regulator and banks to review the capital level is the way to protect banks from risks that is not included in the first pillar. These risks could be reputational risk, liquidity risk, strategy risk, and importantly, the concentration risk, which is the risk of giving out the concentration loans to counterparties (BIS 2006B).

C. Pillar III: Market Discipline

The third pillar deals with the increasing the disclosure of the banks’ process from the above pillars to measure the risk, and capital adequacy (BIS 2006B). However, Hull (2009) argues that banks have a tendency to disclose such information, giving the supervisor a difficult time. The information such as, the level of Tier 1 and Tier 2, the capital reserved for each risk, CAR ratio, and so on. All this should be provided publicly under Basel ii’s standards. Balin (2008) says the intention on this pillar is to increase the discipline for banks and help the shareholders and investors to make a financial decision.

3.4.3 Global Financial Crisis and Basel Regulation

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25

A. Sub-prime lending

The financial crisis has originally begun in the US mortgage market in 2007. At that time, due to the crisis in 1990s, US interest rate was very low, which was one of the policies from the US government to heal the economy (Sanchez 2011). Moreover, they encouraged the people to have houses by allowing the borrowers who had the under standard credit, low equity or income to get loans. This type of loan usually refers to sub-prime loans or lending.

This generated the rapid inflation of the house pricing in the US previous years before 2007. The loan was backed by the house they bought. Thus, there were thoughts circulating the customers that the housing price always increased, and they could easily sell it for the profit. Likewise, if the borrowers fall to pay the obligation, the banks can foreclose the house and sell it on the market with a nice price (Zimmerman 2007). Unfortunately, the prices stopped inflating because the interest rate on sub-prime loans, which was low for some period, was anticipated to increase to reflect the real market situation. Subsequently, this leads to the default from the unable payment of interest rate and loans, and they could not, anymore, make profits from selling house (Bessis 2007).

B. Securitization

Before the financial crisis in 2007, securitization was believed that it was the potential way to sound the financial system by the distribution of risk (Songshin 2009). According to the figure 2, the model begins with banks or originators issue the loan that is backed by the different assets to the borrowers. The assets could be cars, firm bond or house loan. Then, these portfolios of loans are removed from the

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26 bank’s balance sheet and turned into the so-called Collateral Debt Obligations (CDOs). The transferring process is conducted by a company aiming to fund assets, the special purpose vehicles (SPV). The banks make profit by selling this asset-backed loan to the SPV. After that, SPV distinguishes the risk of each transferred loans or securities into different categories, with the advice from ECAIs, by high risk, high returns ideas, and then sell them to the investors all over world. SPV makes profit by selling these CDOs to the investors with the price higher than the principal. Therefore, the flows of interest rate from the borrowers go directly to the investors (Hull 2009). The clash flow of this process is following.

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27

Chapter 4: Theoretical Framework

This chapter aims to give the theories that are mainly used to analyze the study. All theories provided here will be used together with Empirical data to answer the research questions. The theories consist of the detail of Basel iii framework, which has three sections, New level of Capital, Leverage Ratio and Liquidity standards. This Basel iii, 4.1, will be used to answer the first research question. Moreover, it provides the relation of different equations, 4.2, that are used to assess the impact of higher capital level to discuss the second research question.

4.1 Basel iii

The latest Basel Accord is known as Basel iii, and has been officially released at the end of 2010 by BCBS. BCBS clearly realized the needs to improve the regulation and supervisions from Basel ii after the global financial crisis. So, Basel iii aims to increase the quality and quantity of the capital adequacy as well as the inclusion of macro prudential measures (King & Tarbert 2011; cited in Hannoun, 2010, p. 3). The brief framework and its potential consequences are divided into three sections, which is following.

4.1.1 New level of Capital Adequacy

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28 Additional Tier 1. Both of CET1 and Additional Tier 1 must have at least 6% of total risk-weighted assets. They continue saying, for Tier2 Capital, it is aimed to prevent banks from become illiquid. It consists of the hybrid capital debt and various types of subordinate debts. The minimum total capital ratio or TSR for minimum capital is still at least 8% (King & Tarbert 2011; cited in Hannoun, 2010, p. 3).

Figure 3: Structure of Minimum Total Capital Ratio (BIS 2011A).

Moreover, BCBS has emphasized the needs for banks to hold more capital than minimum by introducing two capital buffers which is conservative buffers and countercyclical buffers (BIS 2011A). King and Tarbert (2011) states banks are required to keep the first buffer on the top of minimum capital requirement at 2.5%, only CET1, of total risk-weighted assets. Therefore, this makes CET1 should be at least 4.5% +2.5% = 7% of total risk-weighted assets, which makes the minimum total Capital ratio plus conservative buffer is 10.5% of total risk-weighted assets. For the countercyclical buffers, it comes after the addition of the mentioned buffer. This buffer, ranged from 0-2.5% is required only when the economic faces the excessive credit growth. This is the prevention of the unexpected losses after the downturn is perceived.

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29 of Thailand [Bank of Thailand] (2011) and BIS (2011A) have concluded improvement into five main things. First is the improvement of risk model, that the calculation is deeper, based on the worst case scenario, and stressed more on VAR model. Second is the revision of the way to base on ECAIs to make it reflect more precise risk. This includes the encouragement for banks to develop their own risk rating model with the info from ECAIs, especially with securitization. Third and fourth is the higher charge of risk weight for OTC derivatives, and the more regulations about controlling the risk from securitization respectively. Both of this improvement aims to tighten more capital to buffer the counterparty credit risk. Last is the increase of risk weight for the financial transaction with the internationally active institutions which have high credit risk.

Furthermore, BSBC states that the extra charge is needed for the systemically Important Financial Institutions (SIFIs). This is based on many characteristics of banks for instance, size, market importance, complexity and so on, which is current in the developing process (BIS 2011A).

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30

4.1.2 Leverage Ratio

BSBC defines leverage ratio is the Total Tier1 Capital divided by On and Off balance sheet assets. This must be not less than 3% (BIS 2011A). Dalmaz (2010) says the ratio is designed to be simple and without risk capture measure, which have a possibility not to capture all risk related, leading to excessive leverage. This is to prevent the too much dependence on sophisticated risk model. King and Tarbert (2011) clarifies before the crisis, there are many banks building up the excessive leverage despite that the number of TCR was still in a good level Blundell-Wignall and Atkinson (2010) adds that this leads to the credit crunch from the underestimated intrinsic risk. Moreover, when banks build up excessive leverage, and then face the not captured risk, for example market risk that crushes down the assets’ value, banks will be forced to sell the assets. This also results in systemic liquidity problems.

4.1.3 Liquidity Standards

King and Tarbert (2011) say the liquidity problem is initially one of the significant factors influencing the financial crisis. There were banks finding themselves in the hard situation with the asset conversion to cash, which happened from the tightened short-term funding for banks and the severe decrease in asset’s value. This leads to the lower in the capital level.

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31 Another ratio is NSFR, which aims to ensure the longer-term liquidity and is defined as the available amount of stable funding divided by required amount of stable funding (BIS 2011A). The first funding is source of fund consisting of liabilities and equity part with longer than one year maturity. They are converted by Available amount of stable funding factors (ASF factors) based on the safe from outflow level. For instance, the deposit with insurance from individual gets the higher ASF factors than the wholesale funding. The under fraction is the use of fund for both On and Off balance sheet assets. Differently, these assets are weighted by RSF Factors that range the lowest liquid assets as the highest factors. Both ratios should not exceed 100% (BIS 2011A).

4.2 The Impact of higher capital level

The increase of capital requirement from Basel iii, of course, impacts the profitability for banks (BIS 2010A). Roger and Vitek (2012) states that when banks face the lower of Return on Equity (ROE), they are likely to widen the gap of lending spread, which is the difference between the interest rate on loans and the cost of liabilities, than issue new equities or cutting lending. ROE is the proportion of net income returning to the shareholders (Berk & Demarzo 2009).

The method derived from King (2010) on BIS Working Paper No. 324, is used in this paper. He assumed that banks pass every higher cost of loans to the end-customers by increasing the lending spread on loans. Moreover, to make the methodology possible, the calculation assumes there is no change in ROE, cost of debt and operating cost as well as the source of income and bank’s structure.

The study aims to assess the impact to ROE with a given higher capital level, and the lending spreads required to maintain the same ROE. In this section, the related equations and some explanations from King (2010) are introduced.

Assets = Cash + Interbank Claims + Trading assets + Loans + Investments + Other assets (5) Liabilities = Deposits + Interbank funding + Trading liabilities + Debt + Other liabilities (6)

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32 For the bank income statement, the revenue has been separated into two categories, which is the net and none interest income. First is interest income minus interest expense. Interest income (IntIncome) is the income from loans (IncomeLoans), trading assets, and investments (other IntIncome). Interest expense (IntExp) is from the interest on deposits, interbank funding, trading liabilities and wholesale funding. Non-interest income (NonIntIncome) is generated by the trading assets and trading liabilities (Trading Income) with fee and commissions.

Thus, the net income is from the revenue deducted by operating expense (OpExp) and taxes.

Net Income = [(IncomeLoans + other IntIncome - IntExp) + NonIntIncome - OpExp ](1 - tax) (7)

Then we move to investigate the source of funding. It consists of Short-term liabilities, wholesale funding and equity. Short-term liabilities consist of trading liabilities(TradLiabs) and interbank funding (IBFund). Wholesale funding is the debt with maturing within and longer than one year, which is short and long-term debt respectively. Interest rate(r) on long-term debt is normally higher than short term.

Wholesale funding = Short-term Debt (rshort debt)+ Short-term Debt (1- rshort debt) (8)

The last part in (7) can be referred to Long-term Debt because it is the remain from Short-term debt

IntExp= rdeposit(Deposits) + rshort debt(IBFund + TradLiabs + Short-term Debt) + rlong debt (Long-term Debt) (9)

Where rdeposit is the interest rate on deposit, and rshort debt is the interest rate on short-term debt, which is

also applied on IBFund and TradLiabs, and rlong debt is the interest rate long-term debt. These interest

rates are calibrated from the long-term average from banks’ interest expense on his samples. The equations follow.

rdeposit = x (10)

rshort debt = x + 0.01 (11)

rlong debt = x + 0.02 (12)

The related equations ((8),(9),(10),(11)) can be combined to;

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33 The last source of funding is equity, which can be found by;

rEquity = ROE =

(14)

ROE is the measurement of profit to the shareholders per unit, which is provided every given period. This study focuses on the Capital level. Therefore, TCR is introduced.

TCR =

(15)

King (2010) assumes that the increase of shareholder’s equity is proportional with RWA to meet the TSR.

Et+1= E+ ΔTCR(RWAt+1) (16)

The increase of the equity is offset by the debt, and it is assumed that the long-term debt is placed because it is the most expensive liability.

ΔLong-term Debt = -ΔEquity (17)

Debt is offset with more expensive equity, leading to a decrease in the interest expense since the amount of debt is one of the factors in equation (8), and it is lower. Therefore, the net income will increase, and this causes the lower in ROE. The final assumption is banks offset the ROE by increasing the lending spread (α) on loans.

IncomeLoanst+1= IncomeLoans + (α)(Loanst+1) (18)

Thus, the equation defining the rise in lending spread needed to maintain the same ROE is following. Note that the increase in Capital level is directly relative with the lending spread as long as there is no change in cost of debt and equity, and Long-term debt is offset by the increase in Equity.

α =

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34

Chapter 5: Empirical Parts and Findings

This chapter focuses on the relevant data gathered from the financial statements of the focal banks and Bank of Thailand (BOT)’s documents. The aim is to give the overview of Thai banks’ financial situation. The information here will be mainly used with the theories in Chapter 4 in order to answer the research questions. The structure is presented based on the relevant theory. Thus, it begins with the situation of Thai banks’ capital level, leverage, liquidity ability and ends with the finding of lending spread needed to offset the ROE from higher capital level.

The study takes Thai commercial banks as case study, and has chosen five banks holding the highest total assets from 2009 -2011 as the group to represent the overview of financial situation of banks in Thailand. The five banks are Bangkok Bank (BBL), Krung Thai Bank (KTB), Siam Commercial Bank (SCB), Kasikorn Bank (KBANK) and Bank of Ayudhya (BAY). The data presented in this part is the related financial transaction and detail that are consistent with the Basel iii and the impact of higher capital level theory. Most of it is derived from the five banks’ annual reports and Basel ii – Pillar iii disclosures. Yet, there is some information that is not provided from individual banks. Thus, the others are from the statistic data, from BOT, of 14 average commercial banks used instead of the representative banks, and regulation conducted by BOT.

5.1 Capital level situation of Thai banks

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35

Items (Average Bank 2009 - 2011) Amount(Unit: Million baht)

Tier 1 Capital 119,537

Paid up share capital 39,057 Premium on share capital 19,875 Legal and profit reserve 18,181 Retain earning afer appropriations 41,806 The Others 4,924 Deduction items (1,256)

Tier 2 Capital 45,601 Total Capital (Tier1 + Tier 2) 165,134 Total risk-weighted assets 1,091,549 Minimum capital requirement ( TSR = 8.5% of total RWA) 92,779 Tier1 Regulatory Capital (4.25% of total RWA) 46,390 Total Capital to Total risk-weighted assets 15.19%

Tier1 Capital to Total risk-weighted assets 11.00%

Net loans and accrued interest receivables Net investment in debt securities Deposits (including accrued interest receivables)

The others Total

Avals, guarantees of loans and letter of

credits

OTC derivatives Undrawn committed

lines Total Up to 1 year 494,120 62,919 25,165 - 582,204 35,099 706,420 6,146 747,664 Over 1 year 497,935 88,959 4,655 - 591,548 5,263 453,338 39,187 497,788 Valuation Adjustment (2,340) - - - (2,340) - - - - Total 989,715 151,877 29,819 - 1,171,412 40,362 1,159,757 45,333 1,245,452 Significant on-balance sheet assets and off-balance sheet items before credit risk mitigation classified by remaining maturity (2009)

Remaining Maturity

On-balance sheet assets (Million baht) Off-balance sheet assets (Million baht) Considering the capital structure from Basel ii in Table 1 and comparing with capital adequacy from Basel iii, Banks currently have the amount of CET1 around 99,044 million baht. This number is gained from the accumulation of Paid up share capital, Legal and profit reserve, and Retain earning after appropriations, based on CET1 definition on 4.4.2. It means CET1 is, now, 9.01% of RWA for Thai banks. Another issue affecting the level of capital level is the risk banks taking. According to the detail about risk model improvement in 4.1.1, Basel iii focuses on the deeper risk management to tackle with the complicated financial transaction that they have faced from global financial crisis. Particularly, the purpose is to prevent the credit risk of counterparties. Therefore, the data below shows banks’ transactional assets, exposing to the credit risk, of both on and off balance sheet from 2009-2011.

Table 1: The average capital structure of Thai banks from 2009-2011 (BAY 2011A; BAY 2010A; BAY 2009A; BBL 2011A; BBL 2010A; BBL 2009A; KBANK 2011A; KBANK 2010A; KBANK 2009A; KTB

2011A; KTB 2010A; KTB 2009A; SCB 2011A; SCB 2010A; SCB 2009A)

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36

The others Total

credits

lines Total Up to 1 year 564,611 61,965 27,475 - 654,051 40,873 876,875 11,645 929,393 Over 1 year 577,244 80,133 4,640 - 662,018 6,028 572,835 46,661 625,524 Valuation Adjustment (2,978) - - - (2,978) - - - - Total 1,138,878 142,099 32,115 - 1,313,091 46,901 1,449,710 58,306 1,554,917

Significant on-balance sheet assets and off-balance sheet items before credit risk mitigation classified by remaining maturity (2010)

Remaining Maturity

On-balance sheet assets (Million baht) Off-balance sheet assets (Million baht)

The others Total

credits

lines Total Up to 1 year 595,056 82,193 29,256 3,840 710,344 51,234 925,206 12,620 989,060 Over 1 year 677,656 98,189 2,961 3,586 782,392 6,769 412,650 39,254 458,672 Valuation Adjustment (3,521) - - (62) (3,583) - - - - Total 1,269,191 180,382 32,216 7,364 1,489,153 58,003 1,337,856 51,874 1,447,733

Significant on-balance sheet assets and off-balance sheet items before credit risk mitigation classified by remaining maturity (2011)

Remaining Maturity

On-balance sheet assets (Million baht) Off-balance sheet assets (Million baht)

Table 3: Banks' on and off balance sheet assets exposing to credit risk in 2010 (BAY 2010B; BBL 2010B; KBANK 2010B; KTB 2010B; SCB 2010B)

As shown in Table 2, 3, and 4, it shows the overall assets from banks that contain the significant credit risk from each year, 2009 – 2011. On the on-balance sheet side, more than 80% of assets rely on the loans that are the main interest income for the banks, and most assets are hold with long-term maturity, about 60%, comparing to the short term. The other side is the assets from off-balance sheet. The distinct part item is banks significantly hold OTC derivatives over average 90% of total off-balance sheet assets

Other than OTC derivatives, another main financial instrument causing global financial crisis in 2007, as mentioned in section A and B of 3.4.3 is the securitization, especially the credit risk from CDOs. Thus, this is also the risk that Basel iii aims to buffer. In Thai banks, there are only two, out of the chosen five

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37

Items Fair value (Million baht)

Investmet, net 180,125.10 CDOs 135.91 Average CDOs, Krung Thai Bank from 2009 - 2011

Items Fair value (Million baht)

Investmet, net 75,105.00 Trading securities(private sector) 177.33 Average Trading securities, Bank of Ayudhya from 2009 - 2011

banks, that have been found holding CDO as their investment in the annual reports. The two banks are Krung Thai Banks and Bank of Ayudhya.

Table 5 shows the average amount of CDO that Krung Thai Bank has invested for the past three years. The number of CDOs is considerably only 0.08% of the total investment. For the latter bank, Table 6, the amount of CDOs is not appeared. The annual report only states that the CDOs invested have categorized as one of the trading securities of private sector. So, to avoid the incorrect data, I bring the overall number of these securities, and compare with the total investment. This indicates that even though their investment of CDOs is accumulated with the other irrelevant securities, the proportion is just 0.24% of net investment.

Moreover, as said in 4.1.1, Basel iii requires banks conducting the financial transaction with the internationally active institutions exposing to the high credit risk to increase the risk weight for the particular assets. According to Table 2, 3 and 4, loans represent over 80% of the assets on the on-balance sheet. This can be reasonably viewed that most of the credit risk come from the issued loans.

Table 5: Average CDO that Krung Thai Bank investing from 2009 – 2011 (KTB 2011A; KTB 2010A; KTB 2009A)

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38 Loan to individual customers 1,050,322

Bank of Thailand and Financial Institutions Development Fund 101,165 Commercial banks 3,438 Other ﬁnancial institutions 23,951 Total 128,555 USD 16,260 JPY 1,376 EUR 1,286 Others 5,699 Total 24,620 Total interbank domestic and foreign items 153,175

Average Bank Loan on 2009 - 2011 (Milion baht)

Interbank Domestic items

Interbank Foreign items

Items Amount (Million baht) Tier1 Capital 58,144 On-balance sheet 806,766 Off-balance sheet 888,903

Average 14 commercial banks 2009 - 2011

Therefore, the data, Table 7, showed below is the comparison between the loans banks issue to the individual customers, for instance, corporations, people, etc., and loans issued to the interbank and other financial institutions. Most of the loans are to individual customers, which cover around 70% of total issued loans. The rest is to interbank and financial institutions, that is around 12% for domestics and 18% for the foreign.

5.2 Leverage ratio of Thai banks

BSBC mentioned in 4.1.2 that leverage ratio is the Tier1 Capital divided by On and Off balance sheet assets, which should be at least 3%. The statistic data, from BOT (2012A), of the related data is shown below.

Table 7: The Loans of Thai banks from 2009 – 2011 (BAY 2011A; BAY 2010A; BAY 2009A; BBL 2011A; BBL 2010A; BBL 2009A; KBANK 2011A; KBANK 2010A; KBANK 2009A; KTB 2011A; KTB 2010A; KTB 2009A; SCB 2011A; SCB 2010A; SCB 2009A)

BASEL iii: A need for Thai Banks and the increase of Capital level

Jaydee Wongwatthanaroj