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Game theory in the popular press.

Four-year timeframe looks likely to cover up to B1m limit per account

Bangkok Post
Parista Yuthamanop and Wichit Sirithaveeporn

A limited deposit insurance programme will probably be implemented over four years to allow bank customers time to adjust, according to M.R. Pridiyathorn Devakula, the governor of the Bank of Thailand.

The new programme would eventually insure only up to one million baht per account, he said, a level sufficient to cover 98% of accounts.

The Finance Ministry and the Bank of Thailand yesterday hosted a public hearing on the deposit insurance programme.

Since 1997, the government has maintained an unlimited guarantee on bank deposits and creditors through the Financial Institutions Development Fund.

Under the new programme, a separate deposit insurance agency would be established to cover depositors. Within the first year of being established, the guarantee on creditors of financial institutions would be lifted.

M.R. Pridiyathorn said the limit on guarantees would eventually be phased down from 50 million baht to 20 million to one million over three years, to allow the public time to adjust. But regulators stressed that implementation of the new system would depend on the overall state of both the economy and the financial sector.

M.R. Pridiyathorn said it was up to the government to establish a timeframe for the new programme.

He said lifting the unlimited guarantee on deposits would push financial institutions to take more care in managing risks and lending procedures.

The new agency would be funded through premiums collected from local banks based on their deposits. The rate could be set equal to the current rate of 0.4% of deposits and lending paid by banks to the Financial Institutions Development Fund.

The Finance Ministry will provide initial capital of one billion baht to establish the deposit agency, which will also have supervisory authority to monitor the financial standing of local institutions.

Banks which have failed would fall under the responsibility of the deposit agency, as assets would be used to offset claims paid out to depositors under the insurance programme.

But Twatchai Yongkittikul, the secretary-general of the Thai Bankers' Association, said the new agency could introduce new moral hazard into the system as premiums would be collected at the same rate for both large and small institutions.

Differences between state-owned and private banks were another problem which would complicate operations of the deposit agency.

Dr Twatchai said in an economic crisis or even on rumours of a downturn, deposits would inevitably shift from private banks to state banks.

He said the limit of one million baht per account per institution could also potentially lead to depositors seeking to spread their deposits across different banks in order to maximise their level of protection.

Such a practice would limit market discipline, as depositors would not seek to differentiate among banks based on their risk profiles and financial status.

Dr Twatchai said the current 0.4% fee charged by the FIDF represented a considerable cost for institutions, akin to forcing existing banks to pay for the losses incurred by the fund for failed institutions.

He also noted that the one-million-baht limit, while covering the majority of retail bank deposit accounts, would offer protection for only around 15-16% of total system deposits.

But Chalongphob Sussangkarn, president of the Thailand Development Research Institute, said the deposit agency should be set up quickly. Public fears about the new system would be minimised by phasing in limits and educating depositors, he said.

© Copyright The Post Publishing Public Co., Ltd. 2002