Thailand's large banks should be able to comply with new capital requirements for domestic systemically important banks (D-SIBs), as they already have capital ratios well in excess of the minimum requirements to be implemented by 2020, says Fitch Ratings.
The new requirements were announced by the Bank of Thailand this week and are a step towards the full implementation of the Basel III framework.
Basel III imposes stricter capital requirements on banks "that could have large negative effects on the financial system in the event of their failure or impairment".
The five commercial banks classified as D-SIBs have market share in the range of 10-16% of consolidated assets. They are Bangkok Bank, Siam Commercial Bank, Kasikornbank, Bank of Ayudhya and Krungthai Bank.
In addition to market share, banks were classified as systemically important based on their size, interconnectedness, substitutability and complexity.
D-SIBs will be required to hold additional core capital of 0.5% of risk-weighted assets starting from January 2019 and 1% from January 2020. The minimum common equity Tier 1 (CET1) ratio for D-SIBs will rise to 8% by 2020, and the minimum total capital ratio will rise to 12%.
The new requirements are low compared with those of other Southeast Asian countries. Indonesian D-SIBs will have to hold an extra 1.0%-2.5%, and their counterparts in the Philippines will require an extra 1.5%-2.5%. Singapore already requires its D-SIBs to hold an extra 2%.
Thailand's D-SIBs are unlikely to be affected by the new regulations, Fitch said, as they already exceed the new ratios. Their CET1 ratios ranged from 12.6% to 16.4% in June, while their total capital ratios were 16.3%-18.1%.
The Bank of Thailand's announcement provided greater clarity on how the regulator will assess and supervise D-SIBs, but the news did not change Fitch's view of the sovereign's propensity to support the banking system.
According to Fitch, "Thailand has not implemented specific legislation that reduces the likelihood of state funds being used to support failing banks."
State-owned Krungthai Bank is the only commercial bank for which Fitch takes into account extraordinary sovereign support.
The central bank will take the next step towards Basel III compliance in 2018, when it implements the net stable funding ratio. Even this further change will not represent a challenge to Thai commercial banks, which have stable funding and robust liquidity, Fitch said. The average liquidity coverage ratio was 170% in July.