Damned if you do,
damned if you don't...
Healthy
Thai banks criticized for being healthy
By Jon Fernquest
What happens if banks cut their rates and lend
more and then..... ....the economy gets worse?
The projects financed by these loans fail.
M.R. Pridiyathorn: "...at a time when the economy had slowed and purchasing power was limited, it was a bad idea to encourage small-scale operators to invest as there was a high risk of their businesses going under..." (Source: Bangkok Post, 15-01-09, link)
The loans are not repaid and become non-performing loans (NPLs).
Banks end up with a portfolio of NPLs just like the 50% NPLs of SME Bank (Read article).
Harsh reality:
"...government action to
fix deposit and loan rates would be a complete
reversal and against international standards...I think the government
could use KTB [Krung Thai
Bank] to push loan rates down. But then again, the
government
would also have to accept the potential risk and losses from such an
action..."
What are the "international standards" ?
"...oligopoly was a
thing of the
past, 15 or 20 years ago. Now,
interest rates are set based on the
market mechanism,
which will see one bank take
a leading role in
adjusting interest rates. If others find that the new level is
acceptable, they follow
suit."
damned if you do, damned if you
don't - this saying means: no matter what you
do, you will still get in trouble (no escape)
small-scale operators - small businesses
businesses going under - businesses failing (cannot operate business anymore because not making money)
non-performing loans (NPLs) - loans that the borrower is no longer paying back to the lender anymore
portfolio - the set of investments owned by a person or company
SME Bank - (See website and previous article)
harsh - unkind, showing no sympathy or understanding
harsh reality - a situation very difficult for humans to live in (and also difficult to accept that it is difficult)
Krung Thai Bank - the second-largest bank in Thailandholding assets worth approximately US$28 billion (As of April 2005, the bank's largest shareholder is the Thai Financial Institutions Development Fund (FIDF), which holds 56 percent of all shares. Since the FIDF is controlled by the Ministry of Finance and the Bank of Thailand, Krung Thai Bank effectively remains under state control) (See Wikipedia)
oligopoly - the control of an industry by a small group of companies (See Wikipedia)
market mechanism - a system in which supply and demand in markets determines prices (banks use measures of risk which we do not fully know about, this is their business)
take a leading role in - do first, then others follow...
follow suit - do what the person who came before you did
small-scale operators - small businesses
businesses going under - businesses failing (cannot operate business anymore because not making money)
non-performing loans (NPLs) - loans that the borrower is no longer paying back to the lender anymore
portfolio - the set of investments owned by a person or company
SME Bank - (See website and previous article)
harsh - unkind, showing no sympathy or understanding
harsh reality - a situation very difficult for humans to live in (and also difficult to accept that it is difficult)
Krung Thai Bank - the second-largest bank in Thailandholding assets worth approximately US$28 billion (As of April 2005, the bank's largest shareholder is the Thai Financial Institutions Development Fund (FIDF), which holds 56 percent of all shares. Since the FIDF is controlled by the Ministry of Finance and the Bank of Thailand, Krung Thai Bank effectively remains under state control) (See Wikipedia)
oligopoly - the control of an industry by a small group of companies (See Wikipedia)
market mechanism - a system in which supply and demand in markets determines prices (banks use measures of risk which we do not fully know about, this is their business)
take a leading role in - do first, then others follow...
follow suit - do what the person who came before you did
The situation
Over the last few months since the climax of the crisis in September:It's certainly true that
local banks have been slow to cut
interest rates. Over the past two months, the Bank of Thailand has cut
its one-day repurchase
rate by 175 basis
points to 2% to help the
flagging economy.
Bank minimum lending rates, those quoted to the best customers, have been slower to fall, dropping by around 75 basis points while fixed-deposit rates have dropped by 50 to 150 points.
Gross rate spreads as a result have continued to widen to as high as six percentage points, a level some analysts say is well above those of other markets.
Bank minimum lending rates, those quoted to the best customers, have been slower to fall, dropping by around 75 basis points while fixed-deposit rates have dropped by 50 to 150 points.
Gross rate spreads as a result have continued to widen to as high as six percentage points, a level some analysts say is well above those of other markets.
Deposit interest rates seem to be low, loan interest rates seem to be high. "Gross margin spreads" of six percentage points between deposit rates and prime lending rates are said to be "well above those of other markets."
Others claim that Thailand's banking industry operates in line with market forces and that spreads are more reasonable.
Net interest margins for the seven largest banks averaged 3.46% in the fourth quarter, down from 3.66% in the third. BAY [Bank of Ayutthaya] led all banks at 3.92%, followed by SCB [Siam Commercial Bank] and KBank and 3.76% and 3.75% (Read article).
[Comment: "Gross rate spreads" are obviously not the same as "net interest margins." Perhaps the later has costs built into it. The definitions have to be made more clear to fully understand what is being compared here. Plus what "other markets" if these are other countries, then these stats need to be given also.]
The Bank of Thailand has made aggressive rate cuts hoping to spur commercial banks on and make them cut their rates too.
Krung Thai Bank, Thailand's second-largest bank, could be used to push interest rates down, state banks such as the Government Savings Bank and Government Housing Bank could also be used.
the climax of the crisis - the
height of the crisis (up to now, the future? who knows....)
repurchase agreement, repo - a short-term loan in which shares, bonds are sold with an agreement to buy them back at a certain price in the future (the central bank uses this sort of arrangement as part of monetary policy to control credit and money supply)
one-day repurchase rate - the key interest rate that the Thai central bank uses in monetary policy
a basis point - one hundredth of one per cent (0.01), used to express differences in interest rates
a flagging economy - an economy with reduced activity, that is not moving forward much anymore (low growth)
quoted to the best customers - offered to the best customers
gross - being the total before costs and taxes are taken away
gross rate spreads - the difference in interest rates before costs
X well above Y - X is far above Y
net interest margins - "difference between the amount of interest paid on money borrowed and the amount of interest received from money that has been lent, expressed as a percentage of the average of assets that earn interest in a particular period" (Oxford Business English Dictionary)
spur on - drive, cause or force to do something
Government Savings Bank - the oldest government run bank started in 1913 (See history)
commercial banks - profit-making privately owned banks that take deposits (See list of banks in Thailand)
repurchase agreement, repo - a short-term loan in which shares, bonds are sold with an agreement to buy them back at a certain price in the future (the central bank uses this sort of arrangement as part of monetary policy to control credit and money supply)
one-day repurchase rate - the key interest rate that the Thai central bank uses in monetary policy
a basis point - one hundredth of one per cent (0.01), used to express differences in interest rates
a flagging economy - an economy with reduced activity, that is not moving forward much anymore (low growth)
quoted to the best customers - offered to the best customers
gross - being the total before costs and taxes are taken away
gross rate spreads - the difference in interest rates before costs
X well above Y - X is far above Y
net interest margins - "difference between the amount of interest paid on money borrowed and the amount of interest received from money that has been lent, expressed as a percentage of the average of assets that earn interest in a particular period" (Oxford Business English Dictionary)
spur on - drive, cause or force to do something
Government Savings Bank - the oldest government run bank started in 1913 (See history)
commercial banks - profit-making privately owned banks that take deposits (See list of banks in Thailand)
The debate
But analysts say the argument that the Thai banking sector is an oligopoly with big players in collusion is extreme.Bank profits, for instance, are certain to decline this year as loan growth slows and asset quality deteriorates with the economy. With the Thai economy facing zero or even negative growth this year, local banks are only applying the lessons of the 1997 crisis and seeding away as much capital as possible in anticipation of tougher times ahead.
The growing depth and sophistication of the bond and capital markets, the rise of non-bank consumer finance companies and the large role of the specialised state-owned financial institutions also play an important counterbalance to monopoly power of the largest commercial banks.
But while 18 Thai banks and 16 foreign banks are registered in Thailand, assets, deposits and branches are overwhelmingly dominated by the six largest banks (in order): Bangkok Bank, Krung Thai, Siam Commercial Bank, Kasikornbank, Bank of Ayudhya and TMB.
For Therapong Vachirapong, research director at Phatra Securities, reducing concentration and increasing market efficiency and competition would best be accomplished through further liberalisation of the sector.
[Comment: This is the exact opposite of what is happening in the US, at the center of the economic storm, which is planning increased regulation of the US financial sector, Read today's NY Times article]
Further developing the capital markets would also give investors and borrowers more options beyond the banking system, pressuring traditional intermediaries to reduce cost and potentially pushing bank rates downward.
Mr Therapong said authorities should be less concerned about bank rates than by the continued inability of some groups to even access the formal banking system. Lower-income residents, for instance, are often forced to borrow from the underground market at usurious interest.
(Source #1: Bangkok Post, Rate debate heating up: Bank-bashing in fashion in tough times, Somruedi Banchongduang, 26/01/2009, link)
(Source #2: Bangkok Post, business, 23-01-09, Banthoon defends banks' margins, PARISTA YUTHAMANOP, link)
oligopoly - the
control of an industry by a small group of companies (See Wikipedia)
collusion - secret and illegal cooperation
deteriorates - becomes worse
asset quality deteriorates - an asset provides the owner with less profit
seeding away - saving
seeding away as much capital as possible - saving as
in anticipation of tougher times - save money for bad times when there is: 1. less income, 2. loans are difficult
depth and sophistication of the bond and capital markets - many bonds exists in the market, a lot of people are trading, well-regulated, people know what is going on in the market
X counterbalance to Y - force X balances force Y (moving in the opposite direction)
monopoly power - ability to control prices and quantity available in a market (See Wikipedia)
overwhelmingly X - X much greater than others
X dominated by Y - X more powerful than Y
concentration - a large amount in a small area, many companies in a small industry
liberalisation of the sector - freeing of the sector or industry, less government regulation and control
collusion - secret and illegal cooperation
deteriorates - becomes worse
asset quality deteriorates - an asset provides the owner with less profit
seeding away - saving
seeding away as much capital as possible - saving as
in anticipation of tougher times - save money for bad times when there is: 1. less income, 2. loans are difficult
depth and sophistication of the bond and capital markets - many bonds exists in the market, a lot of people are trading, well-regulated, people know what is going on in the market
X counterbalance to Y - force X balances force Y (moving in the opposite direction)
monopoly power - ability to control prices and quantity available in a market (See Wikipedia)
overwhelmingly X - X much greater than others
X dominated by Y - X more powerful than Y
concentration - a large amount in a small area, many companies in a small industry
liberalisation of the sector - freeing of the sector or industry, less government regulation and control
