Commercial Banksand Monetary

Policy in Thailand

byKobsak Pootrakool

Plan of Presentation

Banks’ heterogeneity and monetary policy

Bank soundness and monetary policy

Future challenges -- changing banking and

financial systems and implications on mone

tary policy

Baseline Simulation of Monetary Transmission Mechanism

1 .01 .01 .0

0 .0

0 .2

0 .4

0 .6

0 .8

1 .0

1 2 3 4 5 6 7 8 9 10 11 12

Deviation from base (Percentage Point) Deviation from base (Percentage Point)

0 .5

0 .6 0 .60 .6

0 .7 0 .8

0 .0

0 .2

0 .4

0 .6

0 .8

1 .0

1 2 3 4 5 6 7 8 9 10 11 12

Deposit rates

Deviation from base (%)

Quarter

Deviation from base (%)

Quarter Quarter

Quarter

-0.9

-1.3 -1.4

-0.3-0.5 -0.6

-0.3

-1.5

-2.1-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1 2 3 4 5 6 7 8 9 10 11 12

Private Credit

Consumption

Investment

-1.0-1.2

-0.7-0.6-0 .5

-0 .6

-2 .5

-2 .0

-1 .5

-1 .0

-0 .5

0 .0

0 .5

1 2 3 4 5 6 7 8 9 10 11 12

GDP

Domestic Demand

Lending rates

Banks’ Heterogeneity: Lending Structures

0%

20%

40%

60%

80%

100%

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Banks’ Heterogeneity: Market Shares

0%

20%

40%

60%

80%

100%

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I. Banks’ Heterogeneity and Monetary Policy

Changing monetary conditions can have

different effects upon different commercial

banks

Large and liquid banks will be less effected

than small banks

Large customers/firms will be less effected

than small customers/firms

Typical impacts of changing monetary conditions on banks’ balance sheet

-0.01

0.00

0.01

0.02

0.03

0.04

5 10 15 20 25 30 35 40 45

Response of LM0 to LM0

-0.005

0.000

0.005

0.010

0.015

5 10 15 20 25 30 35 40 45

Response of LCREDIT to LM0

-0.002

0.000

0.002

0.004

0.006

0.008

0.010

0.012

5 10 15 20 25 30 35 40 45

Response of LDEPOSIT to LM0

-0.002

0.000

0.002

0.004

0.006

0.008

0.010

0.012

5 10 15 20 25 30 35 40 45

Response of LSECUR to LM0

Response to One S.D. Innovations ± 2 S.E.

Large Banks v.s. Small Banks

Effect on Securities holding

QuarterQuarter

Effect on Loans

Small ____Large ……

Small ____Large ……

Large Customers v.s. Small Customers

Sale differences

Sale small firms

Sale large firms Inv. large firms

Inv. small firms

Inv. differences

II. Bank Soundness and Monetary Policy

Banks perform critical tasks in the economy

The recent banking crisis has hampered the

role of the commercial banks as a main

medium to transmit monetary policy

This argues for proper prudential

regulation policy by the central bank to

ensure the effectiveness of monetary policy

Roles of commercial banks in the monetary policy transmission

Exchange rate

Monetaryinstruments

Asset prices

Credit availability

Expectation

Domestic demand

Import prices

Inflation and output

Externaldemand

S-T rates

L-T rates

Linkages between short term rates and commercial rates (MLR)

0

10

20

30

40

92 93 94 95 96 97 98 99 00 01

Recursive C(1) Estimates ± 2 S.E.

-0.2

0.0

0.2

0.4

0.6

0.8

92 93 94 95 96 97 98 99 00 01

Recursive C(2) Estimates ± 2 S.E.

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

92 93 94 95 96 97 98 99 00 01

Recursive C(3) Estimates ± 2 S.E.

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

92 93 94 95 96 97 98 99 00 01

Recursive C(4) Estimates ± 2 S.E.

Libor rate Interbank rate

Deposit rate 3 monthsConstant term

Less stable money supply relationship

0.0E+00

1.0E+06

2.0E+06

3.0E+06

4.0E+06

5.0E+06

6.0E+06

0.0 100,000.0 200,000.0 300,000.0 400,000.0 500,000.0 600,000.0 700,000.0Money Base

M2

Liquidity within the banking system

1996 1998 2000

RP 17,493 356,449 154,990

Government Bonds 17,895 154,192 271,393

Private Securities 90,126 104,161 176,378

Non-resident Banks 179,985 462,497 720,057 Total 305,479 1,077,299 1,322,818

III. Future challenges: Changing banking and financial systems and monetary policy

Similar to unsoundness in the banking sector,

changing financial landscapes can reduce the

effectiveness of monetary policy

The list includes issues such as

- Financial innovation

- Closer financial integration

- Entry of foreign banks, etc.

Ensuring the effectiveness of monetary policy

Distributional

impacts of

monetary policy

Bank soundness

Evolving financial

structures

Conduct detailed

analyses to complement

the macro-model

Maintain appropriate

prudential regulation

Institute a long-term

development policy

At least 3 Measures3 Issues

Conclusion An integrated approach is required by the

central bank in dealing with commercial banks to ensure effectiveness of monetary policy

These include (1) the appropriate prudential regulation and (2) a long-term development plan for the financial sector

Both will complement our ongoing work to improve the framework of monetary policy conduct and will provide foundation for a sustainable development

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Conclusion (cont.)