What are the Basel III Reforms?
The Basel III Reforms, a set of international banking standards developed by the Basel Committee on Banking Supervision (BCBS), will be progressively adopted in Thailand to strengthen the country's financial system. These regulations aim to enhance risk management, improve financial resilience, and promote stability in the banking sector. In Thailand, the Bank of Thailand (BoT) oversees the implementation of Basel standards, adapting them to local financial market conditions. BOT is preparing to implement capital prudential regulations. BoT’s approach is guided by the principles of simplicity, comparability, and sensitivity.
The reforms aim to:
→ Enhance risk sensitivity
Improve the calculation of risk-weighted assets (RWAs) for capital maintenance to better reflect risks and volatility during crises.
→ Promote comparability
Standardize risk assessments across banks that use model-based approaches for capital calculations.
→ Simplify compliance
Ensure that criteria are easier for banks to adopt and implement effectively. Currently, the BoT is conducting a Quantitative Impact Study (QIS) with a selected group of banks to evaluate the impact of Basel III reforms on financial institutions. Based on the results of the QIS, BoT will assess the readiness of the financial sector and establish guidelines and timelines for implementing the reforms in Thailand. The enforcement of these regulations is expected to begin on January 1, 2028 and most of the banks will proactively adopt a six-month parallel reporting period for the transition.
Objectives of Basel Reforms in Thailand
→ Strengthening capital requirements
Aim to enhance bank capital adequacy by improving risk sensitivity in RWA calculations and reducing excessive variability.
→ Introduction of the Output Floor
A backstop for modeled risk weights to ensure consistency and prevent underestimation of risk.
→ Improving risk management
Enhancing the robustness of RWAs to better capture credit, market, and operational risks, ensuring more accurate and reliable risk assessments for UK institutions.
Overall, the Basel reforms aim to ensure more accurate and reliable risk assessments for Thailand institutions.
Key components of the Basel III Reforms
→ Credit Risk
The calculation of risk-weighted assets (RWA) under the standardized and internal ratings-based approaches will align with guidelines CRE20, CRE21, CRE22, CRE30, CRE31, and CRE32.
→ Counterparty Credit Risk
The calculation of asset equivalent values for counterparty credit risk in derivative transactions (SA-CCR) will follow the standards in CRE52.
→ Market Risk
Supervision and capital maintenance for market risk using the standardized approach (FRTB) will be aligned with MAR10, MAR11, MAR20, MAR21, MAR22, and MAR23.
→ Operational Risk
The calculation of operational risk-weighted assets will comply with OPE10 and OPE25.
Who is impacted by the Basel III Reforms in Thailand?
The Basel III reforms may become applicable to local and government-owned banks in Thailand, followed by foreign banks operating within the country. Based on trends observed in other jurisdictions, it is anticipated that the Bank of Thailand will implement credit risk reforms with the following key measures:
→ Restricting the Internal Ratings-Based (IRB) approach
Limiting its use to improve consistency in credit risk assessments.
→ Risk weight assignments
Assigning risk weights for bank exposures based on Standardized Credit Risk Assessment (SCRA) and enhancing due diligence of External Credit Assessment Institutions (ECAI).
→ Specialized lending
Categorizing unrated corporate exposures into pre-operational, operational, and high-quality classifications.
→ SME definitions
Adjusting the definition of SMEs to align with Thailand's unique lending structures.
→ Real estate exposure
Evaluating materiality based on cash flow criteria, incorporating loan-to-value (LTV) calculations.
→ Retail exposure
Considering the impact of transactors and revolvers on retail credit risk.
→ Equity investments
Addressing their treatment and associated reporting changes. For operational risk, BoT is likely to adopt the Standardized Approach, which uses the Business Indicator (BI) and Internal Loss Multiplier (ILM) to calculate risk based on historical loss data spanning 10 years. Market risk reforms are expected to follow the sensitivity-driven Standardized Approach (SA) outlined by the Fundamental Review of the Trading Book (FRTB). BoT may also establish separate timelines for solo and consolidated reporting. This could pose operational challenges for financial institutions, many of which would prefer a unified timeline for consistency and efficiency.
Challenges for Thai financial institutions
→ Data and reporting complexity
Ensuring high-quality data, meeting complex reporting standards, and integrating historical data for long-term risk calculations.
→ Operational and technological strain
Upgrading systems, managing high implementation costs, and addressing skill shortages for compliance.
→ Risk assessment adjustments
Transitioning to new methodologies, such as standardized credit risk models, and adapting local criteria for SMEs, real estate, and operational risk.
→ Regulatory and timeline pressures
Navigating staggered timelines for solo and consolidated reporting while balancing global standards with local requirements.
→ Market and competitive pressures
Meeting stricter capital and liquidity demands without harming profitability, and ensuring smaller institutions can compete effectively.