บทความลงหนังสือพิมพ์เดอะเนชั่น ฉบับวันที่ 25 พ.ค. 2554
The instrument of bill of exchange (BE) was first introduced in Europe for the financing of import and export trade. A merchant that launched a ship to the East could finance the long voyage by issuing BEs to financiers. BEs can be transferred without recourse to the previous holders. Therefore, the financiers who happen to need cash before the ship returned can sell the BEs to others.
In Thailand, about a decade ago, the issuance of BEs suddenly became popular. However,
they were not used to finance trade but instead as a loan instrument. The market was becoming dangerous because it was completely unregulated. The users claimed BEs to be securities. But in actual fact, those BEs were never intended to be traded in the secondary market as securities. They were simply deposit instruments disguising as securities. Therefore, to prevent abuse to consumers, in 1997, the SEC issued
a rule to put BEs under the Securities law. For the BEs that are indeed securities, they should be regulated as such. Rules had since been introduced to ensure that the BEs that are traded as securities have proper information disclosure, adequate credit assessment, customer suitability, and transparency of processes.
But not all BEs were brought under the securities law. The BEs issued by financial institutions were exempted. Even though Thai banks use BEs as deposit instrument, they are not subjected to deposit insurance premium. This practice dated back to the time when the authority provided blanket guarantee
of all bank deposits under the Financial Institutions Development Fund, and continues today even when limited deposit insurance is setting into place. Banks therefore pay deposit insurance premium only on deposits, and not on BEs. Since BEs were supposed to be money market instrument for use by wholesale institutional investors, this approach seems to be fair. The institutional investors are well equipped to assess the financial health of banks by themselves. They don’t need deposit insurance, and they should not be forced to pay for it.
The economic benefits of BEs became more and more pronounced the lower the interest rates. Fifteen to twenty years ago, banks had to pay to the FIDF a premium of 0.4 per cent per annum. At that time, a one year bank deposit yielded 8-10 percent. The premium was 4 per cent of the interest. Today, banks pay to Deposit Protection Agency a premium of 0.4 per cent per annum. However, a one year bank deposit now yields only 2 percent. The premium therefore represents as much as 20 per cent of the interest. The banks that raise deposit by BEs therefore make a substantial saving over deposit accounts. Even though the banks pass on some of this benefit to the BE customers, they certainly retain a good part for themselves.
This has caused the trend of growth of bank BEs to explode. Four years ago (December 2006), there were Bt 141 billion of bank BEs. The figure today is Bt 1,210 billion, representing 14 per cent of bank funding from the public. With lower cost, bank BE is definitely good for the banks. With higher yield, bank BE is also good for the customers. But is this good for the country? We have to consider these five points.
First, it distorts risk perception of savers. BEs are supposed to be money market instrument for institutional investors or professional money managers. But in Thailand BEs had gone through a mutation! BEs are now issued not only to institutions, but most are now issued to private individuals. Previously, BEs were denominated in large amounts of Bt 10 million or more. Nowadays, they go down to the level of ten thousands.
Credit Risk: Are the buyers of these BEs fully aware that they are not covered by deposit guarantee? Are there rules to ensure that bank staff makes adequate customer suitability test similar to the sale of other securities? Are the buyers aware what maximum capital loss may arise in various risk scenarios? Are the buyers able to compare credit risk of BEs of one bank against another?
Liquidity Risk: Are the buyers aware that there is absolutely no secondary market similar to other securities? Are they aware that in the event of a financial crisis, the credit standing of the banks can be questioned, and there is no way out except to wait for BEs to mature?
Second, it can bring down the banks. If the buyers are made fully aware of both the credit risk and liquidity risk, they would be overly sensitive to all news about the banks. They will be the first group to stop the rollover of the BEs. In many countries, many banks had been brought down because they rely too much on money market funding. The most recent case was Northern Rock in the UK. Northern Rock relied on market funding as much as 75 per cent of its funding source. Northern Rock failed in 2007 and had to be bailed out by the authority. The trend shows clearly that Thai banks are relying more and more on BEs. Do you know that today the Thai bank with highest reliance has BEs as much as 60 per cent of its funding source?
Third, it deprives the Deposit Protection Agency of the necessary fund. While BE holders will be hurt if and when the issuing bank goes into liquidation, they will still be as safe as depositors if the bank is bailed out. This is called ‘open bank assistance’ where in many countries Deposit Protection Agency would step in to lend money to the bank, or to buy the bank’s equity, without closing down the bank. In this case, the authority uses public fund to shore up a bank and both the depositors and the BE holders get benefits. However, the money that the authority uses to bail out the bank came only from the depositors. Only they had been paying the insurance premium. The BE holders are getting a free ride.
Fourth, it distorts macroeconomic figures. Thailand is the only country where bank BEs are really big. The normal international practice is for banks to use Negotiable Certificates of Deposit instead. In macroeconomic analysis, BEs count as debt instruments and therefore the more the better. When there is a lot of BEs, it implies that there exists a deep and liquid money market in that country that makes it resilient during a bank crisis. We run the risk of false self congratulation, celebrating the rapid development of the debt market that isn’t really there.
Fifth, it can distort bank regulations. Since the practice of bank BEs is unique to Thailand, beware of the fact that BIS rules may not have thought through about this instrument. Banking regulation on BEs may therefore be too light. And there will be no guidance from outside.
What should be done? My personal opinion is that the SEC should amend the regulations to bring bank BEs under the securities law just like the BEs issued by all other entities. I had proposed this matter to the SEC board. It was approved in principle on the cancellation of the non-securities status of the bills issued or guaranteed by financial institutions. Thus, such bills shall be subject to the SEC supervision pursuant to the SEA Act of 1992. The SEC will now discuss with the Bank of Thailand and others to propose proper rules to the Capital Market Supervisory Board.
Some banks and some sophisticated savers may disagree with my proposal. They may consider it the right of the savers to obtain higher yields and face higher risks. However, I am sure that all will agree with me that it is necessary to put first priority on the safety of the system.
It may also be considered unfair for two banks with the same total amounts of deposit to have to pay the same amount of insurance premium if one bank concentrates on larger depositors and hence will be less of a burden to the Deposit Protection Agency should it fail. Perhaps the insurance premium should be adjusted to better reflect the mix of depositor size profile of each bank.