The Bank of Thailand is rolling out a new measure in the second half of this year with a view to giving banks a nudge to deal with NPLs head on. For NPLs that have long been pending without proper restructuring or legal actions, financial institutions will be required to set aside provisions for the collateral at an increasing rate, depending on the overdue period. Essentially, banks will be required to  2  BIS Review 43/2004  make provision in full, regardless of the collateral value, for loans that have been non-performing for over four years. Also, the Asset Management Corporation, set up exclusively to buy NPLs from the finance companies that were closed down during the crisis, will be enabled to buy NPLs of banks. We are now in the process of amending the Corporation’s charter. On risk-based supervision, the Bank of Thailand has issued a Market Risk Supervision Policy framework at the end of last year - a timely move given a possible upward trend of interest rates. This measure will ensure that financial institutions instill mechanism to manage market risk commensurate with their risk-taking activities, especially in the trading book. Recognizing the need for financial institutions to adjust, the Bank of Thailand will implement the measure in transitional phases. By June 2005, banks will be required, for the first time, to maintain capital fund against market risk.
Prior to that, they will have to comply with guidelines on internal control and trading book policy, as well as submit call reports on the calculation of the volume of trading book transactions and the calculation of the capital charge against market risk. Ladies and Gentlemen, Another factor which will have crucial implications for the banking sector is the Basel II implementation. With the recent release of the Basel II framework, it is inevitable that we get ourselves ready for this international standard of capital adequacy. We all would agree that the New Capital Accord is for the betterment of banking system soundness for it signifies a move away from the one-size-fits-all approach to credit risk assessment in accommodation of evolving more sophisticated risk management of modern banking. Specifically, under the New Accord, it provides more comprehensive and risk sensitive approach to calculate regulatory capital, augmented by supervisory review process of Pillar II and market discipline enforcement of Pillar III. Despite the novel complexity of capital calculation under Pillar I, if a bank adopts the standardized approach, its calculated regulatory capital is only a proxy of the actual risks. I suspect that standardized approach is the one that most banks in emerging markets will adopt before they can meet the preconditions of IRB, or the internal-rating-based approach, especially in the areas of data quality and risk management practices.