S&P's: Bank runs unveil new risk

SINGAPORE — A recent surge in cash withdrawals from a government-owned bank in Thailand suggests the currently weak political environment is starting to affect the country's financial system, Standard & Poor's said in a statement yesterday.

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However, the ratings agency sees the incident as politically motivated, rather than signs of a loss of confidence in any bank.

The Government Savings Bank (GSB) reported saw a net 60 billion withdrawn from its deposit accounts in just three days. The amount was 3% of its deposit base.

The surge in withdrawals was a political backlash after GSB extended a loan to the government-owned Bank for Agriculture and Agricultural Cooperatives (BAAC), which is the paying agent for a controversial rice-subsidy scheme.

"GSB was caught in the crossfire. The run on the bank was limited in nature and is unlikely to have a contagion impact on the banking system," said Standard & Poor's credit analyst Deepali Seth. "But the incident has exposed the vulnerability of the financial system."

A continued surge in withdrawals would have tested the support framework for government-owned specialised financial institutions (SFIs). The government fully guarantees GSB's deposits, but the current caretaker government could have found it difficult to take immediate action to support them.

"SFIs, such as GSB and BAAC, operate under different regulations to commercial banks. Accordingly, the central bank, Bank of Thailand, is not the lender of last resort for SFIs, which collectively form about 20% of Thailand's financial system. As such, the SFIs would be dependent on the interbank market or support from other institutions. The funds from these sources often dry out in a crisis.

"Nevertheless, SFIs can resort to collateralised overnight borrowing from the central bank to meet critical funding needs.

"Our base-case expectation is that the Thai banking sector remain stable, but the risks have increased. We don't expect political issues to be resolved any time soon, and that means further vulnerability for Thai banks," said Standard & Poor's credit analyst Geeta Chugh.

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