The Deposit Protection Agency Act, 2008, went into effect on the 11th of August 2008. Sound in principle, it requires depositors to know the true risk of a deposit, and helps to reduce depositors’ fear where financial institutions have problems or the government is burdened to support financial institutions, identifying specific amounts of money to be paid back to depositors. Nevertheless, it may also bring change and impact in both positive and negative ways.
It will impact depositors, especially high-level depositors, distributing their money to financial institutions, but in amounts that are not fully guaranteed. It will also impact the financial institution system, causing deposits to be transferred to government banks, especially banks guaranteed by the government, and will then be transferred to other government banks, such as the Krungthai Bank and the Nakhornluangthai Bank, as depositors still believe that the government will not let government banks fall into definite bankruptcy.
This act will raise the financial system interest rate. However, to attract depositors, the interest rate for deposits greater than 1 million baht should be higher than that for deposits of less than 1 million baht. Additionally, the increased interest rate for deposits will cost financial institutions more, so the interest rate for loans will also need to increase.
This law will encourage financial institutions to have higher standards as depositors learn more about their risks. High risk financial institutions will also have high deposit mobilization costs and need to deposit in Deposit Protection Funds at a higher interest rate.
Deposit Protection Agencies will impact the economy, providing more economic stability owing to financial sources not only being banks, but other sources moreso. This may result in a lack of credit, affecting medium size enterprises where funds lack for investment and loan costs are higher. Their tendency to loan from financial institutions may also impact economic growth.
The Deposit Protection Agency is a vital development in the Thai economic system. Related organizations should prepare for any change impacts, as follows:
- Implement a risk index to rank financial institutions, and regularly inform people of their risks.
- Specify a formula to calculate the deposit rate needed for the Deposit Protection Fund of each financial institution.
- Increase the choice to save and invest by developing the bond market, promoting stock exchange market investment, deregulating fund investment such as in the social security fund, and supporting community savings through financial institutions, such as saving and credit cooperatives, and credit unions.
- Government banks should extend their role to offer more SME loans due to government banks having more deposits and fewer deposit mobilization costs, thus causing them to be able to offer low interest rates for loan.
- Competition should be promoted among Thai financial institutions by welcoming new financial institutions to compete.
The Deposit Protection Agency is a good system to manage economic risk. However, every change has mixed advantages and disadvantages. Hence, government and financial sectors must adapt for change, and the workforce must also change, learning more in order to manage their own savings.
Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com
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