Thailand’s Deposit Insurance Law: Recent Changes and How They Can Affect You
By Dr. Andrew M. Goodman
17 February 2011
Background Issues and Deposit Insurance: Protecting Your Assets
One of the first actions to take is to make sure that one is informed about the general financial climate, and in particular, that one is aware of the general health of the banks in which one deposits funds, in financial terms. As a rule, the goal is to construct a portfolio with lowered risk and increasing levels of upside potential (Kale, 2006).
This makes knowing the health of a bank imperative. Given this, we might assume that evaluating banks would be a critical undertaking if investments at any level are to be safe. If we cannot determine the health of Banks, what can be done? We must look at the annual reports, recent newspaper and internet articles related to the banks, and take more of a personal stake in evaluating the health of financial institutions. Evaluating banks may seem a monumental task beyond the scope of the average investor. However, in practice, there exist a number of resources that we can turn to: Business.com contains an expensive listing of links and articles and analyses of banks with headquarters in Thailand1. These can be reviewed with a view to profiling the health of a bank to determine risk factors before depositing funds in excess of the one million baht threshold, or just for general banking information. Bank Thailand information services contains a general listing, including websites of most major banks, and can also be used in gaining a perspective on the Thai banking industry and it's key players2.
The whole idea of deposit insurance has been debated at some length, with some analysts feeling that the incentive is lowered for banks to take care of their own financial health if a government scheme is in place. Critics recently lashed out at a program in New Zealand for just this reason (Udanga, R., 2010)3. A further criticism of government protections is that they help create banks which become risk immune and are ‘too big to fail' in the words of some analysts critical of the failures in the US banking system these past two years (Cox, R., & Bravo, F 2010, November 24)4 . Even as the US clears up some of the banking failures, the Federal Deposit Insurance Corporation, which insures bank deposits in the US, is bracing for another round of bank failures that may well be fully as disastrous as the first (Dash, E. 2010, February 24)5. In essence, what can happen is that with the government assuming increasing portions of risk, like deposit insurance or bailing out the banks when they fail, bankers may become increasingly irresponsible, because the risk of failure is transferred to the public domain.
It is of note that, when one considers the case of some of the US banking disasters as noted above, the reason given in part for the establishment of the Act in Thailand back in 2004, was, in part, to avert disasters like the 1997 economic earthquake that hit Thailand and much of Asia (Wichit, C. 2004)6. Connected to this, when insurance is not a factor, or is less of a factor, often there is a tendency for investors to switch funds to capital markets, accepting increased risk because the protections in the banking market are lowered. (Polkuamdee, N. 2005)7. Though this re-allocation of funds is not an objective of governments, it does sometimes come as a by-product of reducing deposit insurance. The reason for this is that, as a general rule with investments, increasing risk will generate increased return. However, when deposit insurance rates are lowered, the actual effect is that there is increased risk (that a bank failure may result in non-insured deposits being forfeited by depositors) but with, generally, no increase in return. The investor, responding logically, may decide to move funds to securities or other avenues in the capital market to compensate for this increase in risk by increasing her/his potential return. Though not an objective of government policy, this may often be a side effect.
Next Page
[1] [2] [3]
1.
2. http://www.bankthailand.info/
3.Udanga, R. (2010, September 23). Deposit insurance advice shunned. Taranaki Daily News . p. 09. Retrieved from EBSCO host
4. Cox, R., & Bravo, F. (2010, November 24). 'Too Big to Fail' Still Here to Stay. New York Times . p. 2. Retrieved from EBSCO host .
5.Dash, E. (2010, February 24). At F.D.I.C., Bracing For a Wave Of Failures. New York Times . p. 1. Retrieved from EBSCO host ..
6. Wichit, C. (2004) (n.d). Deposit insurance law wins cabinet approval in Thailand . Bangkok Post ( Thailand ) , Retrieved from EBSCO host .
7.Polkuamdee, N. (2005). Shift in funds to capital market likely: Impact of deposit insurance changes. Bangkok Post ( Thailand ) , Retrieved from EBSCO host
|
