BOT Notification No 42-2551 (14 September 2017)-check · PDF file5.2.1(1)-(4) when managing their interest rate risk may vary, depending on the scope, ... select the repricing gap

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BOT Notification No 42-2551 (14 September 2017)-check 1/7

Notification of the Bank of Thailand

No. FPG. 42/2551

Re: Regulation on Supervision of Interest Rate Risk in the Banking Book of

Financial Institutions

_______________________________________

1. Rationale

Market risk means the risk of losses to financial institutions’ positions in the

trading book and banking book that may arise from market price volatility. Such

positions include those related to interest rate, exchange rate, equity instrument, and

commodity. Holding large amounts of instruments or market risk positions may cause

adverse impact on financial institutions’ income and capital adequacy, especially

when market price of such positions is highly volatile.

In order to ensure that supervision of financial institutions’ market risk is in

line with international standards and reflects the market risk efficiently, accurately,

and comprehensively, and that financial institutions have appropriate market risk

management, the Bank of Thailand has issued a Notification to prescribe the regulation on supervision of market risk of financial institutions to require financial

institutions with a significant level of trading book transactions to maintain capital

fund to support market risk from 1) positions related to interest rate and equity price in

the trading book and 2) all positions related to exchange rate and commodity price. There are three capital calculation methods, namely, 1) Standardized Approach 2) Simulation Approach and 3) Mixed Approach

In addition to trading book positions, financial institutions’ banking book

positions may be affected from change in interest rate such as held to maturity debt

security investments, loans, or deposits from the public, etc. When the interest rate

fluctuates, financial institutions’ income and/or shareholders’ equity value may be

affected as well. In order to oversee interest rate risk in the banking book efficiently and

to ensure that financial institutions manage interest rate risk incurred from assets,

liabilities and obligations in line with deposits, borrowings or money received from the

public, the Bank of Thailand hereby issues a Notification regarding Regulation on

Supervision of Interest Rate Risk in the Banking Book of Financial Institutions so that

financial institutions can apply the regulation in managing their interest rate risk and

maintaining appropriate capital fund in accordance with the risk level. This Notification

is in accordance with the Financial Institution Business Act B.E. 2551 (2008), whereas

the essence of the guideline remains unchanged.


2. Statutory Power

By virtue of Section 63 and Section 71 of the Financial Institution Business Act

B.E. 2551 (2008), the Bank of Thailand hereby issues the guideline on managing interest rate

risk in the banking book and maintaining appropriate capital fund in accordance with the

risk level of financial institutions, for financial institutions to comply with.

3. Scope of Application

This Notification shall apply to all financial institutions according to the law

on financial institution business.

4. Repealed Notification and Circular

The Circular No. BOT.FPG. (21) C. 2141/2547 Re: Policy on Supervision of

Interest Rate Risk in the Banking Book for Financial Institutions dated 27 December

2004 and Related Reports

5. Content

5.1 In this Notification

“Banking Book” means positions of financial instruments or other transactions

not intended for trading purpose, or financial instruments which were intended, at the

onset, to be held for a long period of time or until maturity. “Interest rate risk in the banking book” means losses to earnings and/or

economic value of financial institutions as a result of change in interest rate which may

arise from both on- and off-balance sheet positions in the banking book. Details of types

and interest rate risk impacts are in Attachment 1. 5.2 Guideline for effective interest rate risk management

5.2.1 Effective interest rate risk management of financial institutions

shall consist of 4 basic elements in managing assets, liabilities and off-balance-sheet

items as follows:

(1) Oversight by the board of directors and senior management;

(2) Adequate risk management policies and procedures; (3) Appropriate risk measurement, monitoring, reporting, and

control;

(4) Effective internal controls related to risk management.

5.2.2 How financial institutions apply the 4 elements as mentioned in


5.2.1(1)-(4) when managing their interest rate risk may vary, depending on the scope,

volume and complexity of the transactions, as well as the level of interest rate risk of

each financial institution. Therefore, the interest rate risk management guideline may be

diverse. For example, small financial institutions whose senior management closely

monitors the day-to-day operations may use a less complex risk management process. Meanwhile, financial institutions with more complex and diverse transactions may need

a more complex risk management process by reporting financial transactions to the

senior management for daily monitoring, having adequate internal controls that include

verification of information to be reported to the senior management in order to ensure

that financial institutions’ operations comply with the specified policies and risk limits.

5.3 Roles and Responsibilities of the Board of Directors and Senior

Management

5.3.1 The board of directors is responsible for approving business

strategies and risk management policies as well as ensures that the senior management

take necessary actions to measure, control, monitor and report on interest rate risk in consistent with the scope, volume and complexity of the financial institutions’

transactions. Moreover, the board of directors shall be informed with adequate and

appropriate information in a timely manner in order to assess the senior

management’s ability to manage interest rate risk to be in line with the specified

policies.

5.3.2 Senior management is responsible for monitoring the interest rate

risk management systems to be in consistent with the risk level and transactions of the

financial institutions as well as establishing risk limit, policies and procedures to

control interest rate risk. Moreover, senior management must allocate sufficient and

appropriate resources and personnel for management of the financial institutions’

interest rate risk.

5.3.3 Financial institutions should have a sub-committee or

individuals responsible for managing interest rate risk as well as ensuring segregation

of duties, responsibilities, and operating procedures of risk management function,

whose duties include risk measurement, controlling, monitoring, and reporting. Such

risk management function shall be independent from position-taking function in order

to avoid conflict of interests and shall directly report to the senior management and

board of directors of the financial institutions. Details of roles and responsibilities of the board of directors and senior

management are prescribed in Attachment 2

5.4 Appropriate Risk Management Policies and Procedures

5.4.1 Financial institutions must establish policies and procedures

related to interest rate risk management in writing and inform relevant parties to


comply with, as well as keep such documents for inspection by the Bank of

Thailand’s examiners. Such policies and procedures shall cover various aspects as

prescribed in Attachment 3.

5.4.2 Financial institutions must review the interest rate risk

management policies on a regular basis, including adjusting the policies to be

consistent with the scope, volume and complexity of the financial institutions’

transactions and changing market conditions.

5.5 Guideline for Risk Measurement, Controlling and Monitoring

5.5.1 Guideline for Risk Measurement

(1) Financial institutions should establish systems that are able

to measure all material interest rate risk and assess the effects from interest rate

change on earnings1 and/or economic value of the financial institutions in an adequate

manner and in consistent with the scope, volume and complexity of the financial

institutions’ transactions. The Bank of Thailand intends to encourage financial

institutions to allocate staff and database systems in order to enhance or develop risk

measurement systems which are able to measure the effects on both earnings and

economic value of the financial institutions, as well as communicating key

assumptions of risk measurement so that they are clearly understood by the financial

institutions’ managment. (2) Financial institutions should have systems and tools to assess

impacts from interest rate change in consistent with the scope, volume and complexity

of the financial institutions’ transactions. Details of the systems and tools for interest

rate risk assessment are prescribed in Attachment 4. (3) Financial institutions whose repricing risk is a major interest

rate risk, with immaterial positions of embedded options2 and complex activities may

select the repricing gap method to assess the impact on earnings. Such method is the

minimum requirement prescribed by the Bank of Thailand. Details of the interest rate

risk measurement by the repricing gap method are prescribed in Attachment 5. (4) Financial institutions should consider the balance sheet

structure and option risk exposure as elementary factors in the consideration to establish

1 Net interest income, at present and expected in the future, including the effects on net income in the

case where the financial institution has materially significant proportion of non-interest income sensitive

to interest rate changes. 2 Embedded options shall mean rights embedded in the financial instruments such as loans or instruments

that allow one party to change the term or cash flow relevant to the contract or instrument . Examples are

loan prepayment without any penalty fee or any other fees, caps, floors and callable bonds, etc . The

embedded options make it difficult to estimate the returns and interest rate risk of such financial

instruments since the probability of exercising such options changes as the interest rate changes.


the interest rate risk measurement systems that can measure interest rate risk effects on

the economic value. For example, financial institutions with significant portion of

embedded options or high proportion of fixed rate long-term assets, but with low

proportion of long-term liabilities. (5) Financial institutions with material exposures in interest rate

risk in foreign currency, as deemed by the financial institutions and are able to explain

to the Bank of Thailand’s examiners, must be able to measure the interest rate risk level

of each currency as well since yield curve of interest rate in each currency may differ. (6) Financial institutions should develop various database

systems in order to measure the interest rate risk for assets and liabilities with uncertain

repricing period or uncertain remaining maturity in accordance with actual behavior of

customers, especially financial institutions with significant level of exposures. For

example, saving and current accounts deposits that depositors may choose to withdraw

at any time (non-maturity deposits) or loans with the right to prepay with no cost since the position values and cash flow time band of these positions may change as market

interest rate changes. Financial institutions that wish to adjust the data to be in line with

customers’ behaviors shall comply with the stipulated guideline as prescribed in

Attachment 6 (7) Financial institutions must conduct a stress test on interest

rate risk, including the case of key assumption breakdowns. Financial institutions

should also take into account those results when establishing and reviewing the interest

rate risk policies and limits. The guideline on conducting stress testing is prescribed in

Attachment 7. 5.5.2 Guideline for Risk Controlling

Financial institutions must establish risk limit system and other related

procedures as well as ensuring strict implementation and regular review in order to

maintain risk within the level as specified by the financial institutions. Details of the

guideline for risk controlling are prescribed in Attachment 8.

5.5.3 Guideline for Risk Monitoring

(1) Financial institutions must obtain an information system that

provides adequate and accurate information for measuring, controlling, monitoring and

reporting interest rate risk. Such reports must be prepared regularly in a timely manner

and presented to the board of directors, other committees, senior management and

various business line managers as deemed appropriate. (2) Financial institutions must conduct validation testing of the

measures and assumptions used in their interest rate risk measurement systems regularly

to ensure that they can identify any possible shortcoming of the systems in order to

improve efficiency and reliability of the risk meansurement systems.


Details of risk reporting and validation testing of tools and

assumptions are as prescribed in Attachment 9. 5.6 Internal Controls Related to Interest Rate Risk Management

Financial institutions must obtain an appropriate internal controls for their

interest rate risk management process and arrange to have a regular and independent

review of the risk management systems in order to evaluate and improve efficiency of

the interest rate risk management systems. Details of the guideline on internal control

and review are prescribed in Attachment 10. 5.7 Guideline on Maintaining Capital Fund

5.7.1 Financial institutions must consider and monitor their capital level

to ensure adequacy and ability to cushion for potential losses from change in interest

rate in their banking book positions.

5.7.2 The Bank of Thailand’s examiners may provide opinions, on a

case by case basis, to require financial institutions with high interest rate risk level

and/or inadequate capital relative to the interest rate risk level to increase their capital

and/or reduce the positions that incur interest rate risk or to undertake any actions to

reduce the interest rate risk exposure. 5.8 Submission of Data and Relevant Reports

5.8.1 Financial institutions shall prepare and submit the data for

measuring interest rate risk in the banking book in accordance with the format and

guideline prescribed by the Bank of Thailand in the Data Management System (DMS). The report shall be submitted within 21 days from the last day of each quarter. Guideline and explanation on data preparation are prescribed in Attachment 11.

5.8.2 Financial institutions with interest rate risk positions in any foreign

currency at a significant level as deemed by the financial institutions must prepare and

submit reports by each currency, in addition to the report in Thai baht. For immaterial

foreign currency positions, financial institutions shall prepare and submit the aggregate

report with other currencies.

5.8.3 Financial institutions that have adjusted data behaviors and already complied with the guideline on adjusting data behaviors shall submit the report by

referring to the adjusted data behaviors together with the assumptions underlying the

adjustments.

5.8.4 Financial institutions must retain documents and various details

supporting data preparation as prescribed by the Bank of Thailand as well as details on


preparation of the reports internally used by the financial institutions for managing the

interest rate risk and submit such information upon request by the Bank of Thailand. 6. Effective Date

This Notification shall come into force the day following the date of its

publication in the Government Gazette. Announced on 3rd August 2008

(Mrs. Tarisa Watanagase) Governor

Bank of Thailand

BOT Notification No 42-2551 (14 September 2017)-check

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Attachment 1

Types and Impacts of Interest Rate Risk

Types of Interest Rate Risk

1. Repricing risk: arises from timing differences in the residual term (for the

case of fixed rate) and the next repricing (for the case of floating rate) of assets, liabilities

and off-balance-sheet items. Although timing differences may be the business fundamental

of financial institutions, they may cause damages to the financial institutions. For example,

a financial institution that uses short-term deposits to fund fixed rate long-term loans may

encounter a decline in its net interest income when interest rate increases since the funding

cost of deposit rates will increase while its earnings from loans remain fixed.

2. Yield curve risk: arises from change in the shape and slope of yield curve

which negatively impact income and economic value of financial institutions. For example,

the economic value of a financial institution having long position in a 10-year government

bond and short position in a 5-year government bond will decline, when the yield curve

becomes steeper (the increase in long-term interest rate is greater than that in short-term

interest rate) since the value of asset which is the 10-year bond declines more than the value

of liability which is the 5-year bond.

3. Basis risk: arises from change in market interest rate, making interest rates

of assets, liabilities and off-balance-sheet items to change disproportionately even though

the residual term or time to next repricing of assets, liabilities and off-balance-sheet items

is the same. For example, when short-term interest rate in the market changes, the deposit

rate, which is based on 1-month LIBOR, and the lending rate, which is based on 1-month

US government bond, may change differently.

4. Option risk: arises from change in interest rate which causes the volume or

period of cash flow from a financial instrument with embedded option to change in a way

that adversely impacts earnings or economic value of financial institutions. For example, a

financial institution purchasing a 30 – year debenture whose issuer can redeem before

maturity, with market interest rate at issuance of 10% and the face value interest rate of

10%. When market rate drops to 8%, the issuer may redeem the debenture, resulting in

change in cash flow that the financial institution expects to receive. This will negatively

affect the financial institution as its reinvestmen rate is lower. Or when a financial

institution is funding through non-maturity deposits which allow the depositors to


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withdraw at any time, interest rate change may lead to change in cash flow of the financial

institution and may adversely affect the financial institution.

Effects of Interest Rate Risk

Change in interest rates can have adverse effects on financial institutions both in the

forms of earnings and economic value. Hence, the interest rate risk effects may be analysed

in 2 perspectives as follows

1. Earnings Perspective means analysis of the effects of interest rate change

on accrual or reported earnings of financial institutions. This is a short-term impact analysis

which is generally used by many financial institutions as a decline in earnings resulting

from change in interest rate may affect stability of the financial institutions.

From the earnings perspective, most financial institutions mainly focus on the

impact analysis on net interest income (the difference between interest income and interest

expense) since they are directly affected by change in interest rate. Nonetheless, financial

institutions with high proportion of non-interest income or fee income should consider the

effects on net income as well (including the effects on net interest income, non-interest

income and operating expense) since some types of fee income correlate with transaction

volume of the financial institutions which may change when interest rate changes such as

loan servicing fees, etc.

2. Economic Value Perspective means analysis of the effects of change in

interest rate on the economic value of assets, liabilities and off-balance-sheet items of

financial institutions.

The economic value of all these items means the present value discounted by the

market interest rate of expected cash inflow from assets, minus expected cash outflow from

liabilities, plus the net expected cash flow of off-balance-sheet items. Therefore, the

economic value perspective of financial institutions reflects sensitivity of the financial

institutions’s net worth to interest rate fluctuations which is a more comprehensive view

than the earnings perspective since it analyzes long-term effects on the financial institutions,

whereas the earnings perspective considers short-term effects within 1-2 years.


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Attachment 2

Roles and Responsibilities of the Board of Directors and Senior Management of

Financial Institutions

The board of directors of financial institutions3 has the roles and responsibilities to

manage interest rate risk as follows: 1. Obtain the knowledge and understand the sources of interest rate risk, risk

exposures and interest rate risk management of the financial institutions;

2. Approve the lines of authority related to interest rate risk management to

ensure balance of power and independence between business unit and risk management

unit which is responsible for identifying, measuring, monitoring and controlling risk;

3. Approve the business strategies related to interest rate risk, interest rate risk

management policies and internal controls including new transaction or product approval

policies;

4. Delegate and oversee that the senior management identify, measure, monitor

and control interest rate risk of the financial institutions in commensuration with the

scope, volume and complexity of the transactions and products as well as allocate

resources that are adequate and appropriate for interest rate risk management of the

financial institutions;

5. Approve the interest rate risk limit or risk level that is acceptable to the


6. Have sufficient, appropriate and timely information in order to evaluate the

interest rate risk management capacity of the senior management to be in line with the

approved policies;

7. Periodically review the interest rate risk management policies of the financial

institutions as well as the business strategies that affect their interest rate risk exposure to

be in consistent with changing circumstances.

3 Or any designated committee in the case of foreign bank branch.


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Senior management has the roles and responsibilities to manage interest rate risk

as follows:

1. Oversee the preparation of business strategies and interest rate risk

management policies for approval by the financial institutions’ board of directors and to

apply the approved policies strictly and comprehensively within the financial institutions

as well as review the said policies to ensure that they are in consistent with changing

circumstances;

2. Establish appropriate lines of authority that are related to interest rate risk

management as well as clearly define the responsibilities of each subordinating unit;

3. Ensure that there are appropriate interest rate risk management systems that

include setting of procedures and methods to identify, measure, monitor, control and

report interest rate risk;

4. Oversee compliance of the interest rate risk management policies and internal

controls as well as effectively review the interest rate risk management systems;

5. Establish risk limit for approval by the board of directors of financial

institutions;

6. Have sufficient, appropriate and timely information in order to assess any

potential losses to the financial institutions caused by change in market risk factors and

other key risk factors both under a normal and crisis situation;

7. Approve new transactions or products of financial institutions as well as set

the objectives and procedures of the transactions to comply with the policies approved by

the financial institutions’ board of directors;

8. Regularly meet or consult with the financial institutions’ board of directors

and risk management staff regarding the risk management procedures and processes;

9. Ensure that staff acquire technical and financial knowledge and understand

related businesses, sufficiently for interest rate risk management and internal controls.


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Attachment 3

Appropriate Interest Risk Management Policies and Operating Procedures

Appropriate interest rate risk management policies should have the characteristics

and details covering various aspects as follows: 1. Clarity and consistency with the scope, volume and complexity of the financial

institutions’ transactions;

2. Specifying risk limits, operating procedures and approval process of various

transactions as well as practical guidance and approval for a transaction that exceeds the

risk limit;

3. Designating lines of authority in each unit with clear segregation from each

other by defining duties and responsibilities of risk-taking business units and risk

management unit as well as guideline and operating procedures that prevent conflict of

interest;

4. Setting clear operating procedures as well as strategies to generate profits and

prevent related risks, types of financial instruments that financial institutions are permitted

to hold and clear objectives for holding such financial instruments;

5. Establishing internal control processes for interest rate risk management

including authority, duties, and responsibilities of the units responsible for reviewing the

interest rate risk management;

6. Identifying a new transaction or product related to interest rate risk with details

covering the following aspects:

6.1 Product description and strategy for undertaking the transaction;

6.2 Resource allocation interest rate risk management of the new product and

transaction;

6.3 Risk analysis of the new product or transaction;

6.4 Procedure to measure, monitor and control risk of the new product or

transaction;

6.5 Consultation result among units related to the new product such as legal

unit, accounting unit, risk management unit and other units prior to commencing the new

product or transaction;

6.6 Monitoring and evaluating result after commencing the new transaction

for use in development of new product and risk management in the future;


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7. Financial institutions must conduct regular review of the interest rate risk

management policies as well as appropriately revise the policies to be in consistent with

the scope, volume and complexity of the transaction and changing market conditions.


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Attachment 4

Systems and Tools for Measuring Interest Rate Risk

1. Risk measurement systems of financial institutions should have the following

characteristics:

1.1 Capable of capturing all materially significant types of interest rate risk of

assets, liabilities and other off-balance-sheet items. 1.2 Consistent with the generally accepted financial concepts and/or techniques

for measuring risks. 1.3 Having clear and written details of assumptions, variables, as well as

methodologies or operating procedures of the systems.

2. Financial institutions may use different systems to measure or manage risks

for different transactions. For example, a financial institution may use the value at risk

method for the trading book positions and repricing gap method or simulation for the

banking book positions, etc. Nonetheless, the financial institution’s management must

understand the integrated view of interest rate risk arising from its various products and

business lines. 3. Tools used for assessing the effects of interest rate change are numerous,

ranging from a static repricing gap method which is a simple calculation and static

simulations which assess the effects of interest rate change from various scenarios using

information of existing positions of the financial institutions, to highly complicated

techniques such as dynamic modeling that is able to reflect the effects of new transaction

and product, possible changing behaviors of consumers in the future, change in business

strategies, and various decision making of the financial institutions as well as being able

to reflect the effects from embedded and explicit options.

In this regard, various tools for measuring interest rate risk are prescribed in

Attachment 4.1


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Attachment 4.1

Interest Rate Risk Measurement Tools and Techniques

Static Repricing Gap Approach

1. The simplest technique for assessing interest rate risk of financial institution is

static repricing gap which may be used to measure the effects of interest rate change on

earnings and economic value of the financial institutions. When it is used for assessing the

interest rate risk effects on earnings, it is called repricing gap analysis. This is the first

technique developed to assess interest rate risk of financial institutions and is widely

adopted by many financial institutions. Nonetheless, some financial institutions may

develop the said technique to be more accurate by applying the duration principle with

the repricing gap table in order to assess the effects of interest rate change on the

economic value. Such technique is called duration-based gap. 2. Static repricing gap technique is prepared by recording assets, liabilities and

off-balance-sheet items which are sensitive to interest rate in a time band table by the time

remaining before maturity (for fixed rate case) or by the time remaining before next

repricing (for floating rate case). In general, this may be called gap analysis, where the

gap size in each time band is calculated from assets deducted by liabilities, added to off-balance-sheet items within that time band. Then the gap in each time band is multiplied by

the assumed change in interest rate in order to estimate change in earnings resulting from

change in interest rate, which is an indicator of repricing risk exposure. The size of

interest rate change used in the analysis can be based on various factors e.g. historical

data, trend of interest rate change in the future and the decision making of the financial

institutions’ management, etc. 3. In designing the interest rate risk assessment systems, financial institutions

should ensure that details of rate-sensitive positions are commensurate with complexity of

the tools since accuracy of each type of interest rate risk assessment tool, for example, as repricing gap partly depends on the number of time bands, aggregation of positions or

cash flows within a too-wide time band will reduce assessment accuracy. In practice,

financial institutions must also evaluate the materiality of reduced accuracy resulting

from setting a time-band width in comparison with the assessment effort.


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4. For assets or liabilities with uncertain repricing period e.g. current account and

saving deposits as well as items whose actual residual term differs from the contractual term e.g. housing loans which allow prepayment without any penalty fee, interest or other

additional fees to the financial institutions, etc. Shall be recorded in the time band

corresponding with actual behaviors as much as possible. Such recording should depend

on the judgment, historical experience and statistical data of each financial institution

5. Negative repricing gap or liability-sensitive gap in each time band will occur

when the difference of interest rate-sensitive assets and liabilities plus the net position of

off-balance sheet items during each time band has a negative value, which implies that

increase in market interest rate tends to reduce net interest income of financial

institutions. Conversely, positive repricing gap or asset-sensitive gap implies that increase

in market interest rate tends to increase net interest income of financial institutions. 6. Although repricing gap analysis is a widely used approach to assess interest

rate risk exposure since it is simple, this general technique has limitations as follows.

6.1 It does not take into account the difference of remaining time before next repricing of each position in a particular time band. That is, every position in each time

band is assumed to mature or to be repriced simultaneously. Hence, if financial

institutions use too wide time band, the caculated risk level is likely to deviate. The

remedy is to set the time band of positions more finely. 6.2 It does not consider the difference of change in each type of interest rate

which may arise as market interest rate changes (basis risk). 6.3 It does not take into account the effects on earnings arising from option

risk e.g. the repayment period may differ from the contractual term as interest rate

changes, etc. 6.4 It does not reflect the effects of interest rate change on non-interest income

and expense which may be significant component of net income of financial institutions. 6.5 The technique using repricing gap analysis is a crude approach in assessing

the effects on net interest income of financial institutions that may arise from assumed

interest rate changes.


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Duration-based Gap Approach

1. Static repricing gap table may also be used to evaluate the effects on economic

value by defining sensitivity weights (duration-based weight) for each time band to

multiply with the gap and interest rate change in each time band to obtain duration

weighted gap. The sum of all time bands gives a rough estimate of change in economic

value of financial institutions that may arise from the assumed change in interest rate.

2. In general, the sensitivity weights in each time band can be estimated from

multiplying the average duration4 (which reflects the percentage change of economic

value of the position to small change in interest rate) of various positions within the same

time band with change in interest rate in each time band. In some cases, the weights may

differ for positions on the asset side and liability side within the same time band in order

to reflect the different coupon rates and remaining terms to maturity of those positions. Moreover, the assumptions on interest rate changes for each time band may differ in

order to reflect differences in interest rate volatility along the yield curve. 3. Financial institutions may calculate a more refine and accurate sensitivity

weight by calculating duration of each asset, liability and off-balance-sheet item. Such

approach will correct potential errors arising from aggregating positions or cash flows of

each time band when calculating average duration. Furthermore, financial institutions may

consider using effective duration instead of modified duration to better reflect non-linear

relationship between economic value change and change in interest rate. Simulation Approaches

1. Financial institutions holding significant proportion of positions with complex

financial instruments or risk sources other than repricing risk should use more

sophisticated risk measurement tools rather than the static repricing gap, such as

simulations, etc. Such techniques assess potential effects of interest rate change on

earnings and economic value in detail by simulating future trend and size of interest rate

change and the effects on cash flows.

4 Duration approach has been applied in 2 forms, namely, 1) Modified Duration is elasticity value which is

equal to normal duration divided by 1+r, where r is the level of market interest rate. Therefore such value will

represent the percentage change on economic value of a position to percentage change in interest rate under

the assumptions that a) change in such value has a linear relationship with change in interest rate and b) timing

of payments is fixed; and, 2) Effective Duration reflects relaxation of such assumptions, therefore it is an

estimated sensitivity of a position to change in interest rate in case there is an embedded options .


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2. Static simulations5 are techniques to assess the effects on interest rate risk

solely on cash flows of financial institutions’ existing positions. For assessing effects on

earnings, these techniques will estimate cash flows and earnings over a specific period

under simulation of more than one case of interest rate change. Generally, they include

changes of the slope and shape of yield curve, and changes in spread of various interest

rates. Assessing the effects on economic value under these techniques can be done by

estimating expected cash flows over the entire life of all positions held by the financial

institutions and discounted back to their present values.

3. Some types of static simulation may be enhanced further from the simple

analysis based on static repricing gap table by separating details of different positions,

both on- and off-balance sheet so that specific assumptions about interest and principal

payments as well as effects on non-interest income and expense can be incorporated in the

assessment. 4. Dynamic simulation is a more complex technique than the static simulation

method. The impact analysis on earnings and economic value is similar to the static

simulation method but with more detailed assumptions on future trends in interest rate

and changes in business activities of financial institutions from the present positions. Therefore, it can better reflect dynamic interaction of cash flows and and interest rates. The simulation may include the following assumptions.

4.1 Financial institutions’ strategies for changing future administered

interest rates such as savings interest rates, etc.; 4.2 Behavior of customers from positions with embedded options and/or

various explicit options such as withdrawal behavior of savings and current account with

unclear remaining time to maturity, loan prepayment, changes of cash flows from

embedded options, etc.; and

4.3 New transactions or products such as new loans or new types of transactions, etc.

5. Financial institutions having material positions in many foreign currencies and

being prepared in terms of personnel with expertise as well as having sufficiently

sophisticated interest rate risk measurement systems may choose to consolidate positions

of several currencies together under the risk assessment systems by making assumptions

on correlations between interest rates of different currencies. Financial institutions which

5 Duration gap described previously can be viewed as a very simple form of static EVE simulation .


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apply assumptions of correlations in aggregating the risk positions must regularly review

the validity of such assumptions as well as assess potential risk exposures in case where

the correlations diverge from the assumptions.


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Attachment 5

Guidelines for Measuring Interest Rate Risk by Repricing Gap Approach

Financial institutions that assess interest rate risk by the repricing gap method

shall comply with following minimum guidelines specified by the Bank of Thailand. There is no behavioral adjustment of items whose remaining maturity or terms to the next

repricing differ from the contractual terms such as loan prepayments, non-maturity

deposits and non-performing loans, etc. Procedures for Measuring Interest Rate Risk

Measuring interest rate risk impact on earnings by the repricing gap method can

be organized into 6 steps as follows: 1. Record assets, liabilities and off-balance-sheet positions in the banking book,

for which there is no behavioral adjustment of items without definite contractual maturity

and loan prepayments, in the repricing gap table where time bands must be divided into

quarters for the first 1-2 year at the minimum in accordance with the guidelines specified

by the Bank of Thailand below. 2. Calculate gap for each time band by netting positions of assets, liabilities and

net off-balance-sheet positions in each time band. 3. Calculate cumulative gap for each time band by adding gap of each time band

to gap of the previous time bands. 4. Assess impact on earnings from interest rate change under assumptions of

interest rate change such as 100-basis-point increase equally throughout the yield

curve(parallel shift in the yield curve) with in 1 year by multiplying 1) gap for each time

band and 2) interest rate change assumption e.g. 0.01 (100 basis points) and 3) proportion

of 1 year time remaining in effect (the midpoint of each time band to 1 year that continues

to be effected by interest rate risk) e.g. for 0-1 month time band, the midpoint is 0.5 month;

thus the proportion of 1 year that the gap in the 0-1 month band will be effected by

interest rate change is equal to (12-0.5)/12 or 0.958. 5. Assess the level of all interest rate risk in banking book, which is equal to the

sum of impacts on earnings arising from interest rate change during 1 year as derived

from Step 4 for all currencies.


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6. Compare the overall interest rate risk level in the banking book derived from

Step 5 with the projected future net interest income of financial institutions within the

next 1 year. Financial institutions may consider assessing interest rate risk in the form of

impact on economic value by using the duration-based gap method applying risk weights

according to the BIS6 guidelines during the initial period by following the procedures

below. 1. Record assets, liabilities and off-balance-sheet items in the repricing gap table

by time bankds as specified by the Bank of Thailand’s guidelines below.

2. Calculate gap for each time band by netting the positions of assets, liabilities

and net off-balance-sheet position in each time band.

3. Multiply the gap in each time band with duration-based weight of each time

band (Table 1) which reflects sensitivity of the position in each time band to change in

interest rate e.g. 100 basis point increase equally throughout the yield curve (parallel shift

in the yield curve).

4. Sum the results derived from netting impacts on economic value in each time

band to yield total impacts on economic value in all time bands for each currency.

5. Sum the impacts on economic value from the table by each currency to yield

aggregate impacts on economic value for all currencies.

6. Compare the aggregate net value of interest rate risk in the banking book

with capital fund of the financial institutions to evaluate the level of interest rate risk in

the banking book.

6 Refer to Principles for the Management and Supervision of Interest Rate, July 2004 of Bank for International

Settlements (BIS)


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Table 1

Weighted Gap

Weighted Gap

in Each Time

Band

Time Band Midpoint of

the Time

Band

Proxy of

Modified

Duration1/

Interest

Rate

Change

Risk Weight

0-1 month 0.5 month 0.04 year 100 bps 0.04%

more than 1-3 months 2 months 0.16 year 100 bps 0.16%

more than 3-6 months 4.5 months 0.36 year 100 bps 0.36%

more than 6-12 months 9 months 0.71 year 100 bps 0.71%

more than 1-2 years 1.5 years 1.38 years 100 bps 1.38%

more than 2-3 years 2.5 years 2.25 years 100 bps 2.25 %



more than 5-7 years 6 years 5.08 years 100 bps 5.08 %




more than 20 years 22.5 years 13.01 years 100 bps 13.01 % 1/ Modified duration of the gap in each time band is approximated from the midpoint of each time

band under the assumption that the rate of return is 5% according to the BIS guideline.


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General Guidelines for Making Entries

1. Items to be recorded in various time bands in the Repricing Gap Table are

assets, liabilities and off-balance-sheet items which are rate-sensitive, including both

interest rate bearing items and non- interest bearing items that are rate sensitive, namely,

financial instruments sold at a discount such as zero coupon bonds, etc. Non-rate sensitive

assets, liabilities and off-balance-sheet items shall be recorded under “Non-rate sensitive”

column.

2. On-balance-sheet items shall be recorded in the Repricing Gap Table using

their book values in baht as at the month end.

3. Off-balance-sheet derivatives shall be recorded by the two-leg approach,

namely, long and short positions, where the derivatives transactions are splitted to

positions of the underlying instruments first. Entries are then made by using 1) principal

value of the underlying in case there is underlying instrument (except option, see 21) or 2) principal amount of the notional underlying in case there is no underlying instrument

such as interest rate swap, FX forward/swap, cross currency swap, etc. Foreign exchange

contracts and interest rate swap contracts between two currencies shall be recorded

separately, one in each respective currency. Interest rate swaps in one currency shall be

recorded as 2 legs : long and short position in the same currency.

4. Financial institutions having material proportion of foreign interest rate

positions as deemed by the financial institutions and are able to justify and have

supporting documents to be presented to the Bank of Thailand’s examiners, shall prepare

the repricing gap table by each currency and record the equivalent amounts in baht using

the contractual exchange rates or, if not specified, the exchange rates on the reporting

date.

5. Interest bearing assets and liabilities shall be recorded in the repricing gap

table by interest rate type. They can be categorized into 2 types as follows.

5.1 Fixed rate items mean assets and liabilities with fixed interest rates. Items

with constant fixed rate throughout the contract such as fixed rate bonds, fixed deposits,

etc. shall be recorded in the time band according to the remaining time to maturity. For

cases where rates are fixed for a period and float in the next period, the entry shall be in

the time bands where floating rates will be in effect. For example, housing loans with

fixed interest rate during the first 3 years, after which the rate will be floating equal to

MLR shall be recorded in the 2-3 year time band.


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5.2 Floating rate items mean assets, liabilities whose interest rates can change.

They can be categorized into 2 types as follows:

(1) Variable rate items mean assets, liabilities whose interest rates

change at the discretion of the counterparty or with reference rates such as LIBOR. For

example, floating rate notes whose rates change with LIBOR, loans whose rates are based

on LIBOR, etc. These items shall be recorded in the time bands according to the time to

next repricing, assuming that the reference interest rate will be adjusted immediately after

the reporting date. If remaining maturity of the assets or liabilities is less than the time to

last repricing, the items shall be recorded by the remaining maturity. (2) Managed rate items mean assets and liabilities with floating

interest rates and no definite repricing dates, but interest rates are adjusted at the

discretion and strategy of each financial institution. For example, loans with interest rates

of MLR + spread, etc. These items shall be recorded in the time band according to the

remaining time until next projected repricing after changes in market rates or reference

rates, assuming that market rates or reference rates will be adjusted immediately after the

reporting date. In this respect, financial institutions should be able to justify the

assumptions related to the repricing period so that the Bank of Thailand can

examine. For example, if a financial institution historically adjusts its interest rates every

3 months, then the item shall be recorded in the 1-3 month time band. Alternatively, if the

financial institution adjusts its rates 1 month following the market interest rate movement,

the item shall be recorded in the 0-1 month time band, assuming that market interest rates

will change immediately after the reporting date.

6. Non-interest bearing assets and liabilities such as zero coupon bond shall be

recorded in the time band by the time remaining to maturity.

7. Assets and liabilities with installed payments (installment items) as opposed to

single payments at maturity should be recorded separately for each amount in the

appropriate time band in response to the period before next repricing of each amount. For

example, a loan with book value of 2 million baht will be repriced in the next 2 months

while there will be a repayment of 100,000 baht in the next 10 days; the entries will be

100,000 baht in the 0-1 month time band and THB 1,900,000 in the 1-2 month time band.

8. Internal deals shall not be recorded in the repricing gap table.


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Details for Recording Assets, Liabilities and Off-Balance-Sheet Items

Assets 1. Cash shall be recorded in the “Non-rate sensitive” column.

2. Interbank items e.g. interbank loans shall be recorded in the time band

according to the time remaining until next repricing for floating rate items and time

remaining until maturity for fixed rate items. 3. Purchase with resale agreements shall be recorded under the heading

prescribed in the Notification of Bank of Thailand Re: Preparation and

Announcement of Financial Statement of Financial Institutions in the time band

according to the time remaining until contractual maturity since they have fixed interest

rates. 4. Investments

4.1 Debt securities with floating rates shall be recorded in the time

band according to the time remaining until next repricing and debt securities with fixed

interest rates shall be recorded in the time band according to time remaining until

contractual maturity.

4.2 Common shares and other equity instruments whose attributes are

similar to equity securities shall be recorded in the “Non-rate sensitive” column. Preferred

shares whose attributes are similar to debt instruments with variable or fixed interest rates

shall be recorded in the time band according to the time remaining until contractual

maturity or next repricing dates, respectively.

4.3 Other securities such as: • Callable bond with clear information regarding redemption

period shall be recorded in the time band which the issuer is expected to redeem such

instrument, by considerting the reference to maturity, call price and current price which

the issuer will call when the price of the instrument is higher than or equal to the call

price. For instance, a 10-year bond whose issuer may call after 5 years, with market price

that reflects interest rate in the next 6 years is equivalent to 102 baht and call price is 101

baht. It is then highly probable that this bond will be called in the 6th year; hence, it shall

be recorded in the 5-7 year time band. In case where there is uncertainty of call period, it

shall be recorded in the time band according to the time remaining until contractual

maturity.


-5/7-

• Convertible instruments shall be recorded as debt instruments,

that is, in the time band according to the next repricing. When such instruments start to

behave like equity instrument, they shall be recorded in the “Non-rate sensitive” column.

5. Loans

5.1 Gross amount excluded accrued interest receivables shall be recorded. 5.2 Generally, they shall be recorded in the time band according to the time

remaining until contractual maturity for fixed rate loans and in the time band according to

the time remaining until next repricing for floating rate loans. Loans with uncertain

repricing dates but rate change depends on the strategy of each financial institution

(managed rates) such as rates based on MLR, MOR and MRR shall be recorded in the

time band according to the remaining time before the financial institution expects to

adjust the next interest rates after change in market rates or reference rates, assuming that

the market interest rates or reference rates will adjust immediately after the reporting date.

5.3 Loans with interim repayment between the reporting date and the next

repricing date shall be recorded in an appropriate time band by separating repayment and

residual amounts. The residual amount (total loan minus repayment amount) shall be

recorded in the time band according to the next repricing, while the repayment amount

shall be recorded in the time band according to the contractual payment date. 5.4 Credit card loans, whose proportion to total loans of financial

institutions are significant, shall be divided into 2 time bands, namely, “Non-rate

sensitive” for outstanding balance which customers pay in full and in the time band

expected to be the next repricing for the outstanding balance, where outstanding balance

in each period depends on the portfolio behavior in the past.

6. Non-performing loans shall be recorded in the “Non-rate sensitive” column.

7. Accrued interest receivables shall be recorded in the “Non-rate sensitive”

column.

8. Allowance for doubtful debts shall be recorded in the “Non-rate sensitive” column.

9. Foreclosed assets shall be recorded in the “Non-rate sensitive” column.

10. Land, premises and equipment shall be recorded in the “Non-rate sensitive” column.


-5/8-

11. Other assets, namely, deposits at the Bank of Thailand, advanced payments

such as prepaid insurance premiums or other non-rate sensitive items shall be recorded in

the “Non-rate sensitive” column.

Liabilities and Shareholders’ Equity

12. Deposits

12.1 Current accounts shall be recorded in the “Non-rate sensitive” column

as financial institutions in Thailand do not give interest for current accounts, hence they

are not sensitive to interest rate change.

12.2 Saving accounts shall be recorded in the time band according to the time remaining before financial institutions expect to adjust the next interest rates after

change in market rates or reference rates, assuming that the market interest rates or

reference rates will adjust immediately after the reporting date. For instance, financial

institutions may enter in the 0-1 month or 1-3 month time band.

12.3 Fixed deposits shall be recorded in the time band according to the

time remaining until maturity.

13. Interbank items such as interbank borrowing shall be recorded in the time

band according to the time remaining until next repricing for floating rate items and until

maturity for fixed rate items. 14. Sale under repurchase agreements shall be recorded under the heading

prescribed in the Notification of the Bank of Thailand Re: Preparation and

Announcement of Financial Statement of Financial Institutions in the time band

according to the contractual maturity since they have fixed interest rates.

15. Other liabilities shall be recorded in the time band according to the time

until next repricing or time remaining until maturity. Items not sensitive to interest rate

change shall be recorded in the “Non-rate sensitive” column such as accrued expenses

which do not incur any interest: they shall be recorded in the “Non-rate sensitive” column.

16. Shareholders’ equity

16.1 Common shares shall be recorded in the “Non-rate sensitive” column. 16.2 Preferred shares with attributes similar to equity instruments shall be

recorded in the “Non-rate sensitive” column and those with attributes similar to debt


-5/9-

instruments shall be recorded in the time band according to the time until next repricing.

16.3 Others such as paid-in capital and retained earnings, etc. shall be

recorded in the “Non-rate sensitive” column. Off-Balance-Sheet Items

17. Forward foreign exchange contracts shall be recorded with the notional

amount in 2 entries as follows: 1) Long position in the currency to receive in the future in

the repricing gap table of such currency; and, 2) Short position in the currency to pay in the

future in the repricing gap table of such currency in the time band according to the time

remaining until maturity of the forward contracts. For instance, a forward foreign exchange

contract which sells baht and buys US dollar, with the contractual amount of 1 million US

dollar in 5 month time, shall be recorded as a short position in the more than 3-6 month

time band of the baht table and long position in the more than 3-6 month time band of the

US dollar table with the equivalent amount in baht. 18. Futures and forward rate agreements (FRAs) shall be recorded with the

notional amounts as 2 entries as follows:

18.1 the first entry related to the underlying instrument shall be recorded in

the time band corresponding to the time remaining until delivery or the time period in

which rights can be exercised plus the time remaining of such underlying instrument (if

any); and

18.2 the second entry related to the said derivative shall be recorded in the

time band corresponding to the time remaining until delivery or the time period in which

rights can be exercised. Example: If a financial institution has a long forward bond, the entries will be: 1) long

position for the notional amount of the instrument to receive in the time band corresponding

to the time remaining until delivery of the forward contract plus the time remaining of the

bond; and, 2) short position for the contract notional amount in the time band corresponding

to the time remaining until delivery of the forward contract.


-5/10-

Example: Sale of a 2 x 5 months FRA, the entries will be: 1) long position for the notional

amount in the 5 month time band; and, 2) short position for the notional amount in the 2

month time band. 19. Interest rate swaps shall be recorded as 2 entries according to the interest

received or paid and relevant remaining time. Received item shall be recorded as long

position and paid item as short position, in the time band according to the time remaining

until maturity for the portion with fixed interest rate and according to the time remaining

until next repricing for the floating rate portion. For example, an interest rate swaps which

a financial institution will receive floating rate and pay fixed interest rate, the entries shall

be 1) long position for receiving item in the time band according to the next repricing, and

2) short position for paying item in the time band according to the time remaining until

maturity of the swap contract. 20. Cross currency swaps shall be recorded in the same way as interest rate swaps,

where the long and short positions shall be entered in the repricing gap tables of relevant

currencies. 21. Options with interest rate and foreign currency as underlying shall be recorded

with delta equivalent value as follows: 1) for the case with no underlying instrument such

as interest rate or currency options, etc., the delta equivalent value equals to the product of

the principal value of the notional underlying multiplied by the delta value; and, 2) for the

case with underlying instrument such as bond options, etc., the delta equivalent value equals

to fair value of the underlying instrument multiplied by the delta value, where the delta

value can be derived from an options pricing model of each financial institution. Two legs

approach shall be employed in recording options in the time bands which is 1) at the time

the underlying contract takes effect and 2) at the time the underlying contract matures.

Example: In April, call options on a June Three-month Interest Rate Future is bought, the

entries will be long position for the time the underlying contract matures in 5 months, and

short position for the 2-month time band. For the currency options, the entries will be long

position in the repricing gap table for the currency to receive and short position in the

repricing gap table for in the currency to deliver.

22. Other obligations such as unused credit facilities, guarantee obligations, etc. shall be recorded with the notional amount in the “Non-rate sensitive” column.

Examples of measuring interest rate risk by Repricing Gap Approach are

prescribed on Attachment 5.1.


-5/11-

Attachment 5.1

Examples of Interest Rate Risk Measurement by Repricing Gap Approach

Financial institutions using repricing gap method to measure interest rate risk in

accordance with the guideline specified by the Bank of Thailand may refer to the example

below, without making any behavioral adjustment for items with no definite residual

contractual terms, prepayments and NPLs. Assume that the positions of a financial

institution as of 30 December 2004 are as follows: 1) total assets is equal to 8,500 million

baht, 2) total capital is equal to 1,200 million baht and 3) exchange rate is 40 baht per one

US dollar. Step 1 Record assets, liabilities and off-balance sheet items in the repricing gap table in

various time bands. Assets

1. Cash of 500 million baht shall be recorded in the “Non-rate sensitive” column. 2. Interbank items: 5-day loan in the interbank market in the amount of 90

million baht shall be recorded according to the remaining time, which is, in the 0-1 month

time band. 3. Investments

3.1 There are 3 items of held to maturity debt instruments as follows: (1) 6-year special D series bond 42/6.00%/6/2 with the book value of

500 million baht, to mature on 5 March 2005, the entry shall be the residual term in the

more than 1-3 month time band;

(2) D series bond 45/4.625%/5 with the book value of 1,000 million

baht to mature on 21 June 2009 (residual term to maturity is 4.5 years), the entry shall be

in the more than 4-5 year time band;

(3) US dollar bond with 15-year residual term and the book value of 5 million US dollar or equivalent to 200 million baht and fixed interest rate shall be

recorded in the US dollar table with the amount of 200 million baht in the more than 10-

15 year time band.

3.2 Available for sales debt instruments in the banking book: AIS093B

debenture with the book value of 500 million baht to mature on 21 March 2009 and the

interest rate of 2.10% plus average 6-month fixed deposit rate of Bangkok Bank, Kasikorn

Bank, Siam Commercial Bank and Krung Thai Bank, where interest is paid on 21 March


-5/12-

and 21 September every year, the entry shall be in the time band of next repricing on 21

Marrch 2005 in the more than 1-3 month time band. 3.3 Available for sales equity instrument: 2,000,000 shares of Land & House

with the book value of 9.5 baht per share shall be recorded in the “Non-rate sensitive”

column with the amount of 19 million baht. 3.4 Equity instrument held for investment: 2,000,000 shares of Banpu with

the book value of 120 baht per share shall be recorded in the “Non-rate sensitive” column

with the amount of 240 million baht.

4. Loans

4.1 Commercial loans

(1) Baht loans with outstanding balance of 1,000 million baht, 6-month

BIBOR and repricing every 6 months. The entry shall be 1,000 million baht in the more

than 3-6 months time band.

(2) US dollar loans with outstanding balance of 7.5 million US dollar

or equivalent of 300 million baht, fixed interest rate and 5-month remaining maturity. The

entry shall be in the US dollar table with 300 million baht in the more than 3-6 month time

band.

4.2 Housing loans

(1) Outstanding balance of 600 million baht, fixed interest rate of 4%

for 2 years, after which the rate will be MLR-0.5%, with monthly principal repayment of 5

million baht. The entry shall be 5 million baht in the 0-1 month time band, 10 million baht

in the more than 1-3 month time band, 15 million baht in the more than 3-6 month time

band, 30 million baht in the more than 6-12 month time band, 60 million baht in the more

than 1-2 year time band and 480 million baht in the more than 2-3 year time band. (2) The remaining 500 million baht with floating rate and to be

repriced within 1 month after change in market interest rate, assuming that the market rate

will change on the day following the report date, shall be recorded in the 0-1 month time

band. 4.3 Personal loans of 100 million baht with 2 year term and fixed interest rate

of 15% shall be recorded in the more than 1-2 year time band.


-5/13-

4.4 Credit card loans of 400 million baht, 150 million baht of which

customers pay in full and 250 million baht is outstanding balance. The 250 million baht

shall be recorded in the more than 1-3 months time band since financial institutions must

inform the customers 30 days in advance befor charging late fees, whereas the 150 million

baht shall be recorded in the “Non-rate sensitive” column since it is the outstanding without

any interest.

4.5 Hire-purchase loans of 100 million baht to be due in 8 months, 150

million baht in 1.5 years, and 300 million baht in 3.5 years, the entries will be made

according to the remaining time to maturity since they have fixed interest rate throughout

the contractual terms. The amounts 100 million baht, 150 million baht and 300 million baht

shall be recorded in the more than 6-12 month, more than 1-2 year and more than 3-4 year

time band, respectively.

5. Non-performing loans of 400 million baht shall be recorded in the “Non-rate

sensitive” column. 6. Accrued interest receivables of 150 million baht shall be recorded in the “Non-

rate sensitive” column. 7. Allowance for doubtful debts of 200 million baht shall be recorded in the

“Non-rate sensitive” column. 8. Properties foreclosed of 300 million baht shall be recorded in the “Non-rate

sensitive” column. 9. Land, premises and equipment of 1,000 million baht shall be recorded in the

“Non-rate sensitive” column. 10. Other assets of 200 million baht shall be recorded in the “Non-rate sensitive”

column.

Liabilities and Shareholders’ Equity 11. Deposits

11.1 Current accounts of 500 million baht shall be recorded in the “Non-rate

sensitive” column. 11.2 Savings of 2,000 mllion with 1% interest rate shall be recorded in the 0-1-

month time band since financial institutions will adjust the deposit rate one month after

market rate changes, assuming that the market rate changes on the day following the

reporting date.


-5/14-

11.3 Fixed deposits

(1) 500 million baht to mature in 3 months, 1,500 million bath in 1

year shall be recorded according to the remaining time to maturity respectively. (2) 12-month fixed deposits of 5 million US dollar or equivalent of

200 million baht with 2-month remaining maturity shall be recorded with 200 million baht

in the more than 1-3 month time band in the US dollar table. (3) 3-year fixed deposit of 7.5 million US dollar or equivalent of 300

million baht with 2.5-year remaining maturity shall be recorded with 300 million baht in

the more than 2-3 year time band in the US dollar table.

12. Interbank item: 5-day interbank borrowing of 900 million baht shall be

recorded in the 0-1 month time band.

13. Borrowing: debenture issuance of 1,000 million baht with 5% fixed interest rate

for 8 years and residual term of 2.8 years shall be recorded in the more than 2-3 year time

band. 14. Other liabilities which are not sensitive to interest rate change in the amount

of 49 million baht shall be recorded in the “Non-rate sensitive” column. 15. Shareholders’ equity of 1,551 million baht shall be recorded in the “Non-rate

sensitive” column.

Off-Balance-Sheet Items

16. Forward foreign exchange contracts of 7.5 million US dollar or equivalent

of 300 million US dollar to purchase baht and sell US dollar in the next 5 months shall be

recorded as a long position of 300 million baht in the more than 3-6 month time band of

the baht table and a short position of 300 million baht in the more than 3-6 month time

band of the US dollar table.

17. Interest rate swaps of 500 million baht to mature in 2 years, where

financial institutions pay fixed interest rate and receive floating rate which is repriced

every 3 months, shall be recorded as a long position of 500 million baht in the 1-3 month

time band and a short position of 500 million baht in the more than 1-2 years time band of

the baht table.


-5/15-

18. 1-year cross currency interest rate THB/USD swap of 5 million US dollar or

equivalent of 200 million baht to mature in 11 months, where financial institutions pay

fixed interest rate in baht and receive floating rate in US dollar, the interest rate is adjusted

every 3 months and next repricing is in 2 months, and upon maturity, financial institutions

pay principal in baht and receive principal in US dollar. The entries shall be a short position

of 200 million baht in the more than 6-12 month (11 month) time band of the baht table, and

a long position of 200 million baht in the more than 1-3 month (2 months) time band of the

US dollar table.

19. Interest rate futures where financial institutions hold a long position in 6-month interest rate future contract of 100 million baht to be in effect in 4 months shall be

recorded as a short position of 100 million baht in the more than 3-6 month time band (4

months) and a long position of 100 million baht in the more than 6-12 month (4+6=10

months) time band of the baht table. 20. Forward rate agreements where financial institutions sell (2,18) forward rate

agreement on baht interest rates for 400 million baht shall be recorded as a long position of

400 million baht in the more than 1-2 year (18 months) time band and a short position of

400 million baht in the more than 1-3 month (2 months) time band of the THB table. 21. Put options where financial institutions long put, in other words, buy rights

to sell US dollar bond held by the financial institutions with delta equivalent value of 5

million US dollar or 200 million baht. At present, the bond has 15 years remaining maturity

and the rights must be exercised within 2 months, the entries shall be a long position of 200

million baht in the more than 1- 3 month (2 months) time band of the US dollar table and a

short position of 200 million baht in the more than 10-15 year (15 years) time band of the

US dollar table. 22. Call options where financial institutions long call or buy rights to buy 3-

month US Treasury Bill with delta equivalent value of 6.25 million US dollar or 250

million baht and the rights must be exercised within 3 months, the entries shall be a long

position of 250 million baht in the more than 3-6 month (3+3=6) time band and a short

position of 250 million baht in the more than 1-3 month (3 months) time band, both

positions are recorded in the US dollar table. 23. Other obligations such as unused overdraft facilities of 100 million baht

shall be recorded in the “Non-rate sensitive” column.


-5/16-

Step 2 Calculate gap for each time band by netting assets and liabilities positions and net

position for off-balance-sheet items in each time band. For instance, in the 0-1 month time

band, RSA and RSL are 595 million baht and 2,900 million baht, repectively, resulting in

a gap before off-balance-sheet items of -2,305 million million and a net position of notional

amounts for off-balance-sheet items of 0 baht. Hence, the net gap is equal to 595-2,900+0 = -2,305. In other words, in the 0-1 month time band, financial institutons have a liability

sensitive position of 2,305 million baht, etc. Step 3 Calculate cumulative gap for each time band by adding gap of each time band to the

gap in the previous time bands. For instance, in the more than 3-6 month time band of the

baht table, the cumulative gap equals to the sum of gap in the more than 3-6 month time

band and that in the more than 1-3 month and 0-1 month time band, which is 1,215+860-2,305= -230 million baht. In other words, in the 0-6 month time band, financial institutions

have a liability sensitive position of 230 million baht and a ratio of cumulative gap to total

assets equal to 2.71 % (-230/8,500=0.0271). Step 4 Measure the effect on earnings from the interest rate change under the assumption

that interest rate increases by 100 basis points equally throughout the yield curve (parallel

shift in the yield curve) within 1 year by multiplying gap in each time band with 100 bps

and proportion of 1 year remaining in effect. For example, in the baht table, the effect on

net interest earnings of the 0-1 month time band is the product of the gap in such time band

which is -2,305 million baht multiplied by the proportion of 1 year remaining in effect

which is 11.5/12 = 0.958. Thus interest increase of 100 bps reduces interest income in the 0-1 month time band by 22.08 million baht (-2,305*0.958*1%). Step 5 Assess the interest rate risk level which is equal to the sum of the effects on net

interest income as a result of interest rate increase in 1 year period as derived from Step 4

of all currencies. For example, increase in interest rate by 100 bps causes the net interest

income in one year to reduce by 11 million baht from the baht table and increase by 1.15

million baht from the US dollar table. Hence, the net interest income of the financial

institutions reduces by 9.85 million baht.

Step 6 Compare interest rate risk level in all banking book positions derived in Step 5 with

the projected earnings of financial institutions. For example, assuming that financial

institutions’ projected earnings for the year 2005 is 200 million baht, the financial


-5/17-

institutions’ interest income will decline by 4.93% of the projected earnings if interest rate

increases by 100 bps.

Measurement of interest rate risk effects on economic value by using duration

weight under the BIS guidelines can be done as follows:

Step 7 Multiply the net position in each time band with the duration-based weight which

reflects the sensitivity of the position in each time band to a parallel increase of interest rate

by 100 bps throughout the yield curve in order to derive the effects on economic value

(EVE) of the position in each time band. For example, in the baht table, the economic value

of the position in the 0-1 month time band will change by the amount of net position of -2,305 million baht multiplied by the duration-based weight of -0.04% which equals 0.92

million baht. Step 8 Sum the net results derived from netting the effects on the economic value of the

position in each time band in order to obtain total effects on economic value of the position

in every time band for each currency. For example, a parallel increase in interest rate by

100 bps throughout the yield curve will reduce the economic value of all baht positions of

the financial institutions by 33.30 million baht.

Step 9 Sum the effects on economic value from all currency tables to obtain the effects on

all currencies. For example, the effect on the economic value from the baht table is a decline

by 33.30 million baht and from the US dollar table is an increase by 5.93 million baht. Therefore, a parallel increase in interest rate by 100 bps throughout the yield curve will

reduce the economic value of financial institutions by 27.37 million baht. Step 10 Compare total effects on the economic value of the financial institutions with their

capital fund. For example, a financial institution has capital of 1,200 million baht; the

increase in interest rate by 100 bps will reduce the economic value of the financial

institution by 2.28% of its total capital.

-5/18-19- Bank ………………………………………………………..

Repricing Gap Table in THB for Period Ended 30 December 2004

Assets

0-1

Month

More than 1-3

Month

More

than

3-6

Months

More than 6-12

Months

More than 1-2

Year

More than 2-3

Year

More than 3-4

Year

More than 4-5

Year

More than 5-7

Year

More than 7-10 Year

More than

10-15 Year

More than 15-20 Year

More than 20

Year

Non-rate

sensitive

Total

Cash 500.00 500.00

Interbank items

90.00 50.00

Investments 1,000.00 1,000.00 259.00 2,259.00

Debt instruments 1,000.00 1,000.00 2,000.00

Held to maturity 500.00 1,000.00 1,500.00

Available for sales 500.00 500.00

Equity instruments 259.00 259.00

Available for sales 19.00 19.00

General investments 240.00 240.00

Other investments 0.00

Loans 505.00 260.00 1,015.00 130.00 310.00 480.00 300.00 500.00 3,500.00

Commercial loans 1,000.00 1,000.00

Consumer loans 0.00

Housing loans 505.00 10.00 15.00 30.00 60.00 480.00 1,100.00

Personal loans 100.00 100.00

BOT Notification No 42-2551 (03-08-08)-check Page 38 of 75

Credit card loans 250.00 150.00 400.00

Hire-purchase loans 100.00 150.00 300.00 550.00

Other credit advances 0.00

Non-performing loans 400.00 400.00

Accrued interest receivables 150.00 150.00

Allowance for doubtful debts (200.00) (200.00)

Net properties foreclosed 300.00 300.00

Net land premises and equipment 1,000.00 1,000.00

Other assets 200.00 200.00

Total Rate Sensitive Assets 595.00 1,260.00 1,015.00 130.00 310.00 480.00 300.00 1,000.00 0.00 0.00 0.00 00.00 0.00 5,090.00

-5/20-

0-1

Month

More than

1-3

Month

More than

3-6

Months

More than

6-12

Months

More than

1-2

Year

More than

2-3 Year

More than

3-4

Year

More than

4-5

Year

More than

5-7

Year

More than

7-10

Year

More than

10-15

Year

More than

15-20

Year

More than 20

Year

Non- rate

sensitive

Total

Liabilities & Shareholders’

Equity

Deposits 2,000.00 500.00 1,500.00 500.00 4,500.00

Current 500.00 500.00

Savings 2,000.00 2,000.00

Fixed 500 1,500.00 2,000.00

Others 0.00

Interbank items 900.00 900.00

Borrowings 1,000.00 1,000.00

Other liabilities 49.00 49.00

Shareholders’ equity 1,551.00 1,551.00

Total Rate Sensitive Liabilities 2,900.00 500.00 0.00 1,500.00 0.00 1,000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5,900.00

Off-balance-sheet item

FRA (400.00) 400.00 0.00

CCRS (200.00) (200.00)

Forward 300.00 300.00

Future (100.00) 100.00 0.00

IRS 500.00 (500.00) 0.00

Put option Call option 0.00

Other obligations 100.00

Total rate sensitive off-

balance-sheet items 0.00 100.00 200.00 (100.00) (100.00) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 100.00


-5/21- Bank ………………………………………………………..

Repricing Gap Table in USD for Period Ended 30 December 2004

Assets 0-1

Month

More than

1-3

Month

More

than

3-6

Months

More than

6-12

Months

More than

1-2

Year

More than

2-3

Year

More than

3-4

Year

More than

4-5

Year

More than

5-7

Year

More than

7-10

Year

More than

10-15

Year

More than

15-20

Year

More than

20

Year

Non- rate

sensitive

Total

Cash 0.00

Interbank items 0.00

Investments 200.00 200.00

Debt instruments 200.00 200.00

Held to maturity 200.00 200.00

Available for sales 0.00

Equity instruments 0.00

Available for sales 0.00

General investments 0.00

Other investments 0.00

Loans 300.00 300.00

Commercial loans 300.00 300.00

Consumer loans 0.00

Housing loans 0.00

Personal loans 0.00

Credit card loans 0.00

Hire-purchase loans 0.00

Other credit advances 0.00

Non-performing loans 0.00

Accrued interest

receivables

0.00

Allowance for doubtful

debts

0.00

Net properties foreclosed 0.00

Net land premises and

equipment

0.00

Other assets 0.00

Total Rate Sensitive

Assets (RSA) 0.00 0.00 300.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 200.00 00.00 0.00 500.00

-5/22-

0-1

Month

More

than

1-3

Month

More

than

3-6

Months

More

than

6-12

Months

More

than

1-2

Year

More

than

2-3

Year

More

than

3-4

Year

More

than

4-5

Year

More

than

5-7

Year

More

than

7-10

Year

More

than

10-15

Year

More

than

15-20

Year

More

than

20

Year

Non- rate

sensitive

Total

Liabilities &

Shareholders’ Equity

Deposits 200.00 300.00 500.00

Current 0.00

Savings 0.00

Fixed 200.00 300.00 500.00

Others 0.00

Interbank items 0.00

Borrowings 0.00

Other liabilities 0.00

Shareholders’ equity Total Rate Sensitive

Liabilities (RSL) 0.00 200.00 0.00 0.00 0.00 300.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 500.00

Off-balance-sheet items

FRA CCRS 200.00 200.00

Forward (300.00) (300.00)

Future IRS 0.00

Put option 200.00 (200.00) 0.00

Call option (250.00) 250.00 0.00

Other obligations 0.00

Total rate sensitive off-

balance-sheet items 0.00 150.00 (50.00) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (200.00) 0.00 0.00 (100.00)


-5/23- Bank ………………………………………………………..

Report of Interest Rate Risk Measurement in THB

For Period Ended 30 December 2004

Unit: million baht

0-1

Month

More

than

1-3

Month

More

than

3-6

Months

More

than

6-12

Months

More than

1-2 Year

More

than

2-3 Year

More than

3-4 Year

More than

4-5

Year

More

than 57

Year

More

than 7- 10

Year

More than

10-15

Year

More than

15-20

Year

More than

20

Year

Non

-rate

sens

itive

Total

1. Total assets 8,500.00

2. Total rate sensitive

assets (Total RSA) 595.00 1,260.00 1,015.00 130.00 310.00 480.00 300.00 1,000.00 0.00 0.00 0.00 0.00 0.00 5,090.00


liabilities (Total RSL) 2,900.00 500.00 0.00 1,500.00 0.00 1,000.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5,900.00

4. Gap (RSA-RSL) (2,305.00) 760.00 1,015.00 (1,370.00) 310.00 (520.00) 300.00 1,000.00 0.00 0.00 0.00 0.00 0.00 810.00

5. Net gap of nominal

amount of rate–

sensitive off-balance-sheet items

0.00 100.00 200.00 (100.00) (100.00) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 200.00

6. Periodic Gap (2,305.00) 860.00 1,215.00 (1,470.00) 210.00 (520.00) 300.00 1,000.00 0.00 0.00 0.00 0.00 0.00

7. Cumulative Gap (2,305.00) (1,445.00) (230.00) (1,700.00) (1,490.00) (2,010.00) (1,710.00) (710.00) (710.00) (710.00) (710.00) (710.00) (710.00)

8. Ratio of cumulative

gap to total assets (%) (27.12%) (17.00%) (2.71%) (20.00%) (17.53%) (23.65%) (20.12%) (8.35%) (8.35%) (8.35%) (8.35%) (8.35%) (8.35%)

9. Effects on net

interest income case

10. Proportion of 1-year

remaining in effect

0.985 0.833 0.625 0.250

11. Effects on net

interest income in

each time band if

interest rate

increases by 100 bps

(22.08) 7.16 7.59 (3.68)

12. Cumulative effects

on net interest

income in 1 year

(22.08) (14.92) (7.32) (11.00)

13. Effects on economic

value case

14. Duration-base

weight

-0.04% -0.16% -0.36% -0.71% -1.38% -2.25% -3.07% -3.85% -5.08% -6.63% -8.92% -11.21% -13.01%

14.1 Proxy of modified

duration

-0.04 -0.16 -0.36 -0.71 -1.38 -2.25 -3.07 -3.85 -5.08 -6.63 -8.92 -11.21 -13.01

14.2 Int. rate change

assumption (basis points) 100 100 100 100 100 100 100 100 100 100 100 100 100

15. Effects on economic

value in each time

band

0.92 (1.38) (4.37) 10.44 (2.90) 11.70 (9.21) (38.50) 0.00 0.00 0.00 0.00 0.00


on economic value

0.92 (0.45) (4.38) 5.61 2.71 14.41 5.20 (33.30) (33.30) (33.30) (33.30) (33.30) (33.30)


-5/24-

Bank ………………………………………………………..

Report of Interest Rate Risk Measurement in USD


Unit: USD

0-1

Month

More

than 1-3

Month

More

than 3-6

Months

More

than

6-12

Months

More

than

1-2

Year

More

than

2-3

Year

More

than

3-4

Year

More

than

4-5

Year

More

than

5-7

Year

More

than

7-10

Year

More

than

10-15

Year

More

than

15-20

Year

More

than

20 Year

Nonrate

sensi

tive Total

1. Total assets 8,500.00


assets (Total RSA) 0.00 0.00 300.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 200.00 0.00 0.00 500.00


liabilities (Total

RSL)

0.00 200.00 0.00 0.00 0.00 300.0 0 0.00 0.00 0.00 0.00 0.00 0.00 500.00

4. Gap (RSA-RSL) 0.00 (200.00) 300.00 0.00 0.00 (300.00) 0.00 0.00 0.00 0.00 200.00 0.00 0.00 0.00

5. Net gap of

nominal amount of

rate–sensitive off-

balance-sheet

items

0.00 150.00 (50.00) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (200.00) 0.00 0.00 (100.00)

6. Periodic Gap 0.00 (50.00) 250.00 0.00 0.00 (300.00) 0.00 0.00 0.00 0.00 0.00 0.00 0.00

7. Cumulative Gap 0.00 (50.00) 200.00 200.00 200.00 (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00)

8. Ratio of

cumulative gap to

total assets (%)

0.00 (0.59%) 2.35% 2.35% 2.35% (1.18%) (1.18%) (1.18%) (1.18%) (1.18%) (1.18%) (1.18%) (1.18%)

9. Effects on net

interest income

case

10. Proportion of 1

year time

remaining in effect

0.958 0.833 0.625 0.250

11. Effects on net

interest income in

each time band if

interest rate

increases 100 bps

0.00 (0.42) 1.56 0.00


on net interest

income in 1 year

0.00 (0.42) 1.15 1.15

13. Effects on

economic value

case

14. Duration-base

weight

-0.04% -0.16% -0.36% -0.71% -1.38% -2.25% -3.07% -3.85% -5.08% -6.63% -8.92% -11.21% -13.01%

14.1 Proxy of modified

duration

-0.04 -0.16 -0.36 -0.71 -1.38 -2.25 -3.07 -3.85 -5.08 -6.63 -8.92 -11.21 -13.01

14.2 Int. rate change

assumption (basis points) 100.00 100.00 100.00 100.00

100.0

0

100.0 0 100.0 0 100.0 0 100.00

100.0 0 100.0 0 100.00 100.00

15. Effects on

economic value in

each time

band

0.00 0.08 (0.90) 0.00 0.00 6.75 0.00 0.00 0.00 0.00 0.00 0.00 0.00


on economic value

0.00 0.08 (0.82) (0.82) (0.82) 5.93 5.93 5.93 5.93 5.93 5.93 5.93 5.93


-5/25-

Bank ………………………………………………….

Report of Interest Rate Risk Measurement in All Currencies


Unit: million baht

Currency Interest Rate changes by 100 Basis Points

Effects on Net Interest Income Effects on Economic Value

THB

US DOLLAR

JAPANESE YEN

POUND STERLING

EURO

HONG KONG DOLLAR RINGGIT

SINGAPORE DOLLAR OTHERS

(11.00)

1.15

(33.30)

5.93

Total effects from Interest Rate

changes (9.85) (27.37)

Percentage of projected Net Interest

Income in the next one year (4.93)

Percentage of current capital funds (2.28)


-6/1-

Attachment 6

Guideline on Information Adjustment to Commensurate with Actual Behavior

Financial institutions that intend to adjust information to be in accordance with

customers’ behavior shall comply with the following guidelines: 1. Assumptions underlining behavioral adjustments on financial institutions’

transaction must be consistent, reasonable and in coherence with interest rate conditions.

2. Financial institutions should avoid using assumptions which are not referable

from past experience or are not feasible. Large financial institutions should analize the

assumptions based on statistical concepts. Financial institutions can use various

information in developing the assumptions as follows:

2.1 Statistical analysis of portfolio and customers’ behavior in response to

change in interest rate which may vary depending on market conditions or factors specific

to financial institutions such as customers’ characteristic, type of financial institutions,

etc. 2.2 Model developed by financial institutions or vendor such as prepayment

model. 2.3 Information from business units and the management regarding business

and pricing strategy as change in business or pricing strategy may affect the behavior of

cash flows of non-maturity items.

3. Sufficient time must be allocated for monitoring behavior of each activity

before making behavioral adjustments.

4. Financial institutions’ board of directors or other delegated committee and the

senior management should review key assumptions and assess the impact at least once a

year to ensure validity of such assumptions since change in market condition,

competition and strategy may affect validity of the assumptions.

5. Financial institutions must maintain supporting documents in developing the

assumptions and review of such assumptions in writing, and should have more than one

person acknowledge the development process of the assumptions.

6. Financial institutions should ensure that all significant positions and both on- and off-balance sheet cash flow are included in the measurement systems in a timely and

consistent manner. Such data include coupon rate, cash flow of financial instruments,


-6/2-

time for interest rate adjustment and other important conditions specified in the contract. In case where data are adjusted differently from the contractual term, financial

institutions must establish a clear and appropriate method, procedure and reason in

writing for inspection, especially, adjustment of expected cash flow for expected

prepayment of customers or early redemption of securities’ issuers.

7. Financial institutions’ management and users of the information on interest rate

risk assessment should have good understanding of the underlined assumptions and use

the information with caution. Particularly, in case where the technique is complex, even

though the result is theoretically accurate, such information may not be adequate for risk

management if the assumptions or variables used in the calculation are not reasonable and

not in line with the situations. Therefore, financial institutions must prepare documents relating to the assumptions and any relevant variables in a clear and understandable

manner. Such documents shall be reviewed regularly and financial institutions shall

evaluate validity of the assumptions at least once a year.

Example of data adjustments to correspond to actual behaviors is prescribed on

Attachment 6.1


-6/3-

Attachment 6.1

An Example of Data Adjustment to Correspond to Actual Behavior

Interest rate risk measurement is an assessment of risk based on on- and off-

balance-sheet items and taken into account the time remaining to contractual maturity or

until next repricing. Hence, in order for such risk measurement to be more accurate, the

outstanding balance of each item to be recorded in a time band of the repricing gap or

duration-based gap table should correspond to actual behaviors as much as possible. Financial institutions should therefore adjust the data to correspond with actual behaviors

of key items which tend to deviate from the contractual maturity dates especially non-maturity deposits (NMDs), which are savings and current accounts and mortgage loans, or

other types of loans whose borrowers have the right to prepay as well as non-performing

loans. In considering making behavioral adjustments to these items, financial institutions

should evaluate significance of the effects from these items, depending on specific

attributes of financial institutions or market conditions at each period. For example,

market with interest rate on a rising trend, or the case where financial institutions stipulate

that customers pay all penalty fees or part of the differences between contractual interest

rate and market interest rate for prepayment may not entice the customers to prepay the

loans. Hence, the said effects may not be significant.

An Example of Behavioral Adjustment of Non-Maturity Deposits (NMDs)

Factors that determine the Volume of NMDs

NMDs are key source of funds of financial institutions. The outstanding balance of

NMDs may vary in different scenarios, such as: • Funding needs and financial institutions’ ability to find other sources of

funds. For example, during high liquidity situations, financial institutions may adopt a

pricing strategy which discourages deposits. • Pricing strategies and customer base of financial institutions. For instance,

financial institutions may waive fees for customers who maintain the minimum deposit

balance or may specify tiered pricing strategies for each customer group.


-6/4-

• Market strategies and strategies regarding deposit products: Financial

institutions may set targeted customer base by designing products specific for a group

such as products for a non-rate sensitive group and products for a rate sensitive group.

• Numbers and types of competitors in the market: Strategies of competitors

including commercial banks, mutual funds and insurance companies give customers more

options which may affect deposit volume of the financial institutions.

• Levels and trends of market interest rates have tremendous effects on

movement of deposits. The higher the difference between market rate and deposit rate, the

more movement of deposits.

• Product developments and changes in supervisory guidelines affect deposit

structures and customers’ behaviors. For instance, repeal of the deposit rate ceiling of the

Bank of Thailand on 25 February 2004. Thus, in analyzing NMDs, financial institutions

should account for new financial products in the market and supervisory guidelines to be

in effect since they may affect the customers’ behaviors.

The aforementioned factors demonstrate that volume of NMDs may change at

all times. Hence, adjusting NMD data to correspond to actual behaviors of the customers

should start from demographic analysis of targeted customers of financial institutions and

analysis of various aforementioned factors in order to assess their effects on customers’

behaviors and pricing. Sample tools which financial institutions may employ for such

analysis are as follows:

Method 1 Analysis of Non-core Deposits and Core Deposits

Step 1 Categorizing deposits into non-core and core deposits In analyzing and setting assumptions related to NMDs, it is necessary to

differentiate between 1) core balances which are long-term and stable deposits and 2) non-core balances which are short-term and temporary deposits. This can be accomplished by

analyzing the behavior of deposits by type, occupation and other demographic factors of

the customers based on historical statistical information. Examples of non-core deposits

are (1) seasonal deposits such as deposits of customers in agricultural sector which

increase or decrease seasonally or deposits of customers with fixed income or retirees

whose balances are usually highest at month-ends, (2) deposits whose behavior is similar

to working capital of busineses, etc.


-6/5-

Core deposits which are deposits which stay with financial instituions for longer

term than non-core deposits should be separated into 2 groups, a rate sensitive group and

a non-rate sensitive group, by observing the customers’ past behaviors, deposit

information or employing statistical analytical tools, which will facilitate development of

assumptions related to NMDs. For examples, 1) analysis of effects of market interest rate

on deposits rate, where, in general, financial institutions will adjust deposit interest rate

subsequent to market rate change and in a smaller amount than the market rate change

and 2) Analysis of the effect of market interest rate on deposit volume from change in

spread (the difference between interest rate that financial instituions offer to customers

and yield from other sources). If financial institutions offer lower interest rate than the

alternatives, the customers may move their deposits elsewhere. Hence, if financial

institutions monitor the spread and administer opportunity cost of the customers, they will

be able to determine the effects on the NMDs volume.

Step 2 Developing assumptions and compiling assumptions used for measuring

interest rate risk Non-core deposits are short-term deposits and constantly fluctuate. Financial

institutions may assume that such deposits will remain for less than 6 months. Therefore,

they should be recorded in the less than 6-month time band of the repricing gap table or

distributed in shorter time bands depending on behaviors of the customers of financial

institutions which may differ for each financial institution.

For core deposits which are sensitive to change in market interest rates or in

competitors’ rate, if financial institutions do not adjust their NMD interest rates in

response to the market interest rate or the competitors’ rate, such deposits shall be

recorded in the short time bands of the repricing gap table where outflow of deposits is

expected since they are ready to leave the financial institutions, should other returns be

higher. Core deposits which are not rate sensitive will remain with financial institutions

even if the financial institutions do not adjust the NMD interest rate according to the

market rates or the competitors’ rate. Such is crucial to the interest rate risk measurement,

for which financial institutions may employ several methods as follows:

• Assign the entire amount as long-term deposits which are non-rate sensitive

and will remain at financial institutions forever without due date, assuming that financial

institutions’ operations are on-going and that the deposit volume reduces as a result of

demographics characteristics of the customers, for instance, death or relocation. Such

deposit amount will be equally replaced by new customers. Nonetheless, financial

institutions employing this method must prepare sensitivity analysis to assess effects on

earnings and liquidity if these deposits leave the financial institutions as well.


-6/6-

• Distribute the deposits in different time bands based on the demographic

assumptions of the customers. • Assign the entire amount as long-term deposit which is not quite rate sensitive

but setting maximum maturity in assigning time band such as no longer than 10 years due

to difficulty in predicting customers’ behavior, competition, industry and supervisory

guidelines.

Financial institutions should consider assigning longer time bands in the repricing

gap or duration-based gap tables for these deposits during rate increase periods as compared

to rate decrease periods. Moreover, the persons setting assumptions related to NMDs should

consult the marketing managers who look after the customers for the benefit of developing

assumptions on residual terms of these deposits. Method 2 Impact Analysis of Pricing Spread on Components of NMDs by Net Income

Simulation

Normally, net income simulation has already included the effects from cap and

floor as well as effects from market rate change on deposit rate and outstanding balance

of NMDs. For instance, simulation may calculate the correlation where increase in market

rate by 200 bps will lead to increase in deposit rate of financial institutions by 75 bps;

whereas, decrease in market rate by 200 bps will lead to decrease in deposit rate by 125

bps. This demonstrates that different speed and size of change in interest rate differ

depending on the level and direction of change in market rate. In case where market

interest rate increases, deposit rate may be adjusted at a slower rate and at lesser degree

than the case where market rate decreases. In measuring the effect of pricing spread and

market interest rate on deposit volumes, simulation may indicates lesser change in the

deposit volume in the case where market rate is on a rising trend. Method 3 Replicating Portfolio Analysis

This analysis is based on viewing NMDs as a portfolio of many types of financial

instruments with different interest rates and maturities as a result of different pricing and

strategies for each customer group. In estimating maturities of NMDs under this method,

financial institutions must use statistical approaches to find which replicating portfolio

consists of various financial instruments with definite maturities and has interest rate

adjustment period similar to NMDs. For instance, financial institutions may find that

changes in the yield of replicating portfolio consisting of 3-month treasury bills and 2- year treasury notes are close to changes in the interest rates of NMDs. As such, financial

institutions can use the duration of the replicating portfolio in estimating the maturity of

the NMDs.


-6/7-

An Example of Adjustments of Non-performing Loans

Non-performing loans (NPL) is another important item of financial institutions.

Adjusting such data may be performed by units responsible for monitoring NPLs such as

debt restructuring unit or collection unit in order to estimate groups of loans under their

responsibilities with regards to the probability, proportion and recovery period that such

NPLs will be performing in the future. Alternatively, adjustments may be based on

experiences or historical statistics. The portion of outstanding NPLs expected to recover

in the future shall be recorded in accordance with the general guidelines for recording

entries. For example, NPL of Company A has a probability that 50% of its outstanding

balance will be paid with the interest rate of MLR-2% within the next 18 months. The

entries will be 50% of the amount in the more than 1-2 years time band and another 50% in

the non-rate sensitive column.


-7/1-

Attachment 7

Guideline for Stress Testing

1. In developing scenarios for stress testing, financial institutions should take

into account their strategies and positions as well as tailoring to type of risk relevant to

each financial institution. Possible scenarios of stressful conditions are:

1.1 Abrupt changes in various interest rates;

1.2 Changes in relationship among key market interest rates (Basis Risk); 1.3 Changes in slope and shape of yield curve (Yield Curve Risk); 1.4 Changes in liquidity of key financial markets;

1.5 Changes in volatility of various interest rates;

1.6 Key assumptions or parameter breakdowns such as assumptions for

illiquid financial instruments, non-maturity financial instruments and

change in business strategies, etc.

2. In conducting stress testing, financial institutions should specially consider

financial instruments or markets with high concentration since such positions may incur

difficulty in liquidating or hedging during stressed situations, as well as consider “worst

case scenario” which rarely occurs, in addition to more probable events. The management

and board of directors and/or other committees must periodically review both the process

and stress test results and must ensure that appropriate contingency plans are readily in

place.

3. In addition to conducting stress testing under the scenarios developed by

financial institutions in order to reflect the positions of each financial institution, the

Bank of Thailand may require financial institutions to conduct stress testing under the

scenario specified by the Bank of Thailand (supervisory scenario) in order to assess

overall impact of interest rate risk on the financial institution system under a single

scenario, for which the Bank of Thailand will advise financial institutions in due course.


-8/1-

Attachment 8

Risk Limits and Control

1. Risk limits of financial institutions should have initial elements as follows:

1.1 Have been approved by the board of directors for aggregate

interest rate risk limit or by other designated committees for detailed limits;

1.2 Commensurate with the scope, volume and complexity of the

positions held by financial institutions as well as commensurate with the capital level;

1.3 Consistent with the techniques used in measuring interest rate risk

and should reflect potential effects of interest rate change on earnings and/or economic

value;

1.4 Ensure that positions that may exceed the risk limit receive

immediate management attention;

1.5 Able to control all interest rate risk exposures that are material to


1.6 Able to compare potential gains against potential risks of

undertaking various transactions or products;

1.7 Able to monitor the actual risk level from various transactions

against predetermined risk limits;

1.8 Stipulating clear and concise practical guidance, specifying which

limits are never to be exceeded, which can tolerate temporary breach, for how long and

for what reason; every step must be documented in writing such as stating the reason to

exceed risk limits and authorized person, etc.; 1.9 Regularly review the limits so that they correspond with the

complexity of the financial institutuions’ risk measurement systems.

2. Financial institutions may consider establishing interest rate risk limits by

setting an aggregate interest rate risk limit and risk limit by type of interest rate risk that

are material or by individual portfolio or by type of transactions, etc.

3. Risk limits for measuring effects of interest rate change on earnings should

be set based on volatility of both net income and net interest income in order to fully assess

the interest rate risk of financial institutions, including the effects on the non-interest

income as well. In general, such risk limits will specify acceptable levels of earnings

volatility under specified interest rate scenarios.

4. Risk limits for effects of interest rate change on economic value should be

appropriately established to commensurate with the scope, volume and complexity of the

positions of financial institutions. Financial institutions holding long-term positions or

engaging in activities related to options or financial instruments with embedded options in


-8/2-

high proportion should consider setting risk limits to address effects on economic value of

the financial institutions with more details.

5. Interest rate risk limits may be established from scenarios of exceptional

movements in market interest rates which simulate stress situations that rarely occur but

have severe impact by taking into account historical interest rate volatility and time

required for management to address such exposures. Risk limits should be based on

measures derived from the underlying statistical method such as techniques that yield

earnings at risk or economic value at risk, etc. Moreover, specified scenarios should take

account of the full range of possible sources of material interest rate risk that may occur to

the financial institutions. Hence, simple scenarios using parallel shift in interest rates may

be insufficient to comprehensively reflect all types of risks.


-

-9/1- Attachment 9

Reporting of Risk and Validation Testing of the Tools and Assumptions Adopted

Reporting of Risk

The reporting form submitted to financial institutions’ board, other committee and

multi-level of management may vary. However, at a minimum, such reporting shall include

the following:

1. Executive summary and overall interest rate risk level as well as individual

type of significant interest rate risk

2. Reports presenting financial institutions’ compliance with the policy and

relevant risk limits

3. Key assumptions such as manageable interest rate policy, behaviors of non-

maturity deposits and information about debt prepayment, etc.

4. Results from stress testing, including testing breakdowns of major

assumptions and variables.

5. Summary of matters found from reviewing policies, procedures regarding

interest rate risk and adequacy of interest rate risk assessment systems, as well as any

matters found by internal and external auditors and other consultants.

Validation Testing of the Tools and Assumptions Adopted

Validation testing of tools and assumptions may be done as follows:

1. Reviewing validity of the techniques and computing formulas can be done

by comparing with the techniques accepted by academics or generally used in the financial

market; and/or

2. Compare the results from the systems/techniques used with actual events;

and/or

3. Compare the results from the systems/techniques with those from other

systems/techniques.


-10/1-

Attachment 10

Internal Controls and Reviews of Related to Interest Rate Risk Management

Internal Controls Related to Interest Rate Risk Management

1. Financial institutions should have adequate internal controls for interest rate

risk management systems, commensurate with the scope, volume and complexity of the

transactions with an aim to ensure efficiency of the interest rate risk management systems

of financial institutions.

2. Internal controls of interest rate risk management systems should be an

integral part of the overall internal controls of financial institutions and must be strictly

enforced internally throughout the financial institutions.

3. Internal controls of interest rate risk management systems must be concise

and suitable for practical operations.

4. Internal controls of interest rate risk management must have clear control

activities such as policies and operating procedures for interest rate risk management such

as transaction approval procedures, monitoring of risk limits, reconciliations and reporting

of information as well as other procedures established by the financial institutions to

achieve interest rate risk management objectives.

5. Internal controls of interest rate risk management systems should include

continual reviews by independent units.

6. Financial institutions’ board of directors or other designated committees

must receive information on reviews and internal controls that is clear, adequate,

appropriate and timely. Reviews of Interest Rate Risk Management System

1. Financial institutions shall establish reviews on interest rate risk management

systems as an integral part of internal controls with an atim to assess effectiveness of the

risk management systems, personnel’s compliance with the established policies and

operating procedures. 2. Financial institutions shall arrange for reviews and assessments of the interest

rate risk management systems at least once a year, conducted by unit independent from

business units related to risk. For large financial institutions or those with complex

transactions, such unit should be independent from risk management units as well. Moreover, resources and tools appropriate for reviews must be available, whereby in the

initial stage, if reviews of interest rate risk management systems are not conducted by


-10/2-

unit independent from the risk management unit, financial institutions shall assign

individuals or groups with experts to be responsible for the reviews and assessments. Documents demonstrating the reviews as well as close monitoring by the management

should be made readily available for the Bank of Thailand’s examiners.

3. Financial institutions must arrange to have the results of the reviews as

well as any recommendations reported to the senior management and board of directors

in an adequate and timely manner for consideration of further actions. Moreover, reports,

documents and evidences from the reviews from both internal and/or external units must

be kept and made available for the Bank of Thailand’s examiners.

4. The reviews and assessments of interest rate risk management systems

should be able to identify factors that may affect effectiveness of interest rate risk

management and internal controls such as change in personnel or technology, risk limit

structure and monitoring procedures for cases that breach risk limits.

5. In reviewing to assess interest rate risk management systems, financial

institutions should consider the following aspects, depending on the scope, volume and

complexity of financial institutions’ transactions.

Qualitative Aspect

5.1 Supervision of the board of directors and senior management of financial

institutions on interest rate risk management process

5.2 Compliance with interest rate risk management policy

5.3 Responsibilities of interest rate risk management unit towards

development and management of risk measurement, control and monitoring

5.4 Appropriateness of the interest rate risk measurement systems relative to

the scope, volume and complexity of transactions

5.5 Appropriateness and reliability of the underlying assumptions used in

assessing interest rate risk, clear supporting documentation, integrity of information used

in the calculation and analysis

5.6 Personnel with adequate expertise in interest rate risk management


-10/3-

Quantitative Aspect

5.7 Volume of various financial products and their sensitivity to interest rate

changes

5.8 Effects on earnings and/or capital from change in level and/or shape of the

yield curve

5.9 Effects on earnings and/or capital from various significant interest rate risk

such as basis risk or option risk, etc.


-11/1-

Attachment 11

Preparation of Information and Related Reports

For the purpose of the Bank of Thailand in supervising and assessing financial

institutions’ interest rate risk in the banking book, financial institutions shall prepare and

submit the required information in the data management system (DMS). Upon receipt of

such information, the Bank of Thailand wil compile into an assessment report of interest

rate risk in the banking book for of all currencies as prescribed in Attachment 11.1 and a

report of interest rate risk assessment for each currency as prescribed on Attachment 11.2. In this regard, financial institutions shall refer to the explanation for preparation of

information to be submited to the Bank of Thailand.


-11/2-

Attachment 11.1

Report of Interest Rate Risk Measurement in All Currencies

For Period Ended on ……………………..

Unit: THB

Currency*

Interest Rate changes by …….. Basis Points

Effects on Net Interest

Income

Effects on Economic

Value

THB

US DOLLAR

JAPANESE YEN

POUND STERLING

EURO

HONG KONG DOLLAR

RINGGIT

SINGAPORE DOLLAR

OTHERS

Total Effects from Interest

Rate change

Percentage of Projected

Net Interest Income during

the upcoming one year

Percentage of current

capital fund

*For foreign currencies, financial institutions shall prepare and report significant currenry

separately.


-11/3-

Explanation forReport Preparation

Report of Interest Rate Risk Measurement in All Currencies A. General Explanation

1. This is a summary report of the assessment of interest rate risk of positions

in the banking book of financial institutions for all currencies. It is to assess the effects on

net interest income and economic value from increase in interest rate in all currencies by

100 basis points or any change that the Bank of Thailand will further advise.

2. Financial institutions shall refer to the guideline on using repricing gap

method to assess interest rate risk as prescribed by the Bank of Thailand in Attachment 5

and example of the assessment of interest rate risk using repricing gap method in the

Attachment 5.1 of the Supervision Guideline on Interest Rate Risk in the Banking Book

of Financial Institutions.

3. Any inquiry regarding this report should be directed to Prudential Policy

Department, Financial Institutions Policy Group, the Bank of Thailand at Tel.: 0-2283-6821,

0-2356-7688, 0-2283-5805 and 0-2283-5804.

B. Definitions

This is a summary report of effects from change in interest rate on the banking book

positions for all currencies of financial institutions. Financial institutions shall report the

effects on net interest income and economic value from increase in interest rate by 100

basis points for every currency that financial institutions prepare in separate interest rate

risk measurement report by currency.

“Interest Rate Change by 100 Basis Points” means assumption that the interest rate

increases by 100 basis points thoughout the yield curve within 1 year. “The Effects on Net Interest Income” means the amount of net interest income of

the banking book positions that change when interest rate increases by 100 basis points.

“The Effects on Economic Value” means the economic value of the banking book

positions that change when interest rate increases by 100 basis points.

“Thai Baht” means banking book positions in Thai baht affected by change in

interest rate which financial institutions must report the effects on net interest income and

economic value using the calculated result of the effects from the Report of Interest Rate

Risk Measurement in Thai Baht.


-11/4-

“US DOLLAR” means banking book positions in US dollar affected by change in

interest rate which financial institutions must report the effects on net interest income and

economic value using the calculated result of the effects from the Report of Interest Rate

Risk Measurement in US Dollar. The amount shall be reported in an equivalent value in

baht.

“JAPANESE YEN” means banking book positions in Japanese Yen affected by

change in interest rate which financial institutions must report the effects on net interest

income and economic value using the calculated result of the effects from the Report of

Interest Rate Risk Measurement in Japanese Yen. The amount shall be reported in an

equivalent value in baht. “POUND STERLING” means banking book positions in Pound Sterling affected

by change in interest rate which financial institutions must report the effects on net interest

income and economic value using the calculated result of the effects from the Report of

Interest Rate Risk Measurement in Pound Sterling. The amount shall be reported in an

equivalent value in baht. “EURO” means banking book positions in Euro affected by change in interest rate

which financial institutions must report the effects on net interest income and economic

value using the calculated result of the effects from the Report of Interest Rate Risk

Measurement in Euro. The amount shall be reported in an equivalent value in baht. “HONG KONG DOLLAR” means banking book positions in Hong Kong Dollar

affected by change in interest rate which financial institutions must report the effects on

net interest income and economic value using the calculated result of the effects from the

Report of Interest Rate Risk Measurement in Hong Kong Dollar. The amount shall be

reported in an equivalent value in baht. “RINGGIT” means banking book positions in Ringgit affected by change in interest

rate which financial institutions must report the effects on net interest income and economic

value using the calculated result of the effects from the Report of Interest Rate Risk

Measurement in Ringgit. The amount shall be reported in an equivalent value in baht. “SINGAPORE DOLLAR” means banking book positions in Singapore dollar

affected by change in interest rate which financial institutions must report the effects on

net interest income and economic value using the calculated result of the effects from the

Report of Interest Rate Risk Measurement in Singapore Dollar. The amount shall be

reported in an equivalent value in baht.


-11/5-

“OTHERS” means the aggregate positions in the banking book other non-material

currencies that are affected by change in interest rate which financial institutions must

report the effects on net interest income and economic value using the calculated result of

the effects from the Report of Interest Rate Risk Measurement in Other Currencies. The

amount shall be reported in an equivalent value in baht.

“Total Effects from Interest Rate Change” means sum of the effects on net interest

income and economic value of the positions in all currencies from increase in interest rate

by 100 basis points. “Percentage of Projected Net Interest Income during the upcoming one year” means

proportion of total net interest income affected from increase in interest rate by 100 basis

points on the projected net interest income during the upcoming one year of financial

institutions. “Percentage of current capital fund” means proportion of total economic value

affected from increase in interest rate by 100 basis points to current capital fund of financial

institutions.


-11/6-

Attachment 11.2

Bank ………………………………………………………..

Report of Interest Rate Risk Measurement in ……………………………………… Currency

For Period Ended …………………………………………. Unit: Baht

0-1

Month

More

than

1-3

Month

More

than

3-6

Months

More

than

6-12

Months

More

than

1-2

Year

More

than

2-3

Year

More

than

3-4

Year

More

than

4-5

Year

More

than

5-7

Year

More

than

7-10

Year

More

than

10-15

Year

More

than

15-20

Year

More

than

20

Year

Non-rate

sensitive

Total

1. Total assets

2. Total capital

funds

3. Cash 4. Interbank items 5. Net investments 6. Loans 7. Accrued interest

receivables

8. Allowance for

doubtful debts

9. Net properties

foreclosed

10. Net premises and

equipment

11. Other assets 12. Total Rate

Sensitive Assets


13. Deposits 14. Interbank items 15. Borrowings 16. Other Liabilities 17. Shareholders’

Equity

18. Total Rate

Sensitive

Liabilities (Total

RSL)


-11/7-

0-1

Month

More

than

1-3

Month

More

than

3-6

Months

More

than

6-12

Months

More

than

1-2

Year

More

than

2-3

Year

More

than

3-4

Year

More

than

4-5

Year

More

than

5-7

Year

More

than

7-10

Year

More

than

10-15

Year

More

than

15-20

Year

More

than

20

Year

Non-rate

sensitive

Total

19. Net position

before off-

balancesheet

items (RSA-

RSL)

20. Net position of

nominal

amounts of

rate sensitive

off-balance

sheet items

20.1 Net position of

rate sensitive non-option

items

20.2 Net position of

rate sensitive options

21. Periodic gap 22. Cumulative gap 23. Ratio of

cumulative gap

to total assets

(%)

24. Effects on net

interest

income

25. Proportion of 1

year time

remaining in

effect

0.958 0.833 0.625 0.250


26. Assumption of

interest rate

change (basis

points)

100 100 100 100

27. Effects on net

interest income

in each time

band

28. Accumulative

effects on net

interest income

in 1 year period

29. Effects on

economic

value

30. Duration-based

weight

-0.04% -0.16% -0.36% -0.71% -

1.38%

-

2.25%

-

3.07%

-

3.85%

-

5.08%

-

6.63%

-

8.92%

-

11.21%

-

13.01%

30.1 Proxy of

modified duration

-0.04 -0.16 -0.36 -0.71 -1.38 -2.25 -3.07 -3.85 -5.08 -6.63 -8.92 -11.21 -13.01

30.2 Assumption

of interest rate change

(basis points)

100 100 100 100 100 100 100 100 100 100 100 100 100

31. Effects on

economic value

in each time

band

32. Cumulative

effects on

economic value


-11/8-

Explanation forReport Preparation

Report of Interest Rate Measurement in Each Currency A. General Explanation

1. This is a report of interest rate risk assessment on banking book positions in

baht and any currency material to financial institutions, by measuring the effects on net

interest income for each currency from change in increase in interest rate by 100 basis

points or any change that the Bank of Thailand will further advise.

2. Financial institutions shall refer to the guideline on using repricing gap

method to assess interest rate risk as prescribed by the Bank of Thailand in Attachment 5

and example of the assessment of interest rate risk using repricing gap method in the

Attachment 5.1 of the Supervision Guideline on Interest Rate Risk in the Banking Book

of Financial Institutions. 3. Financial institutions must prepare separate reports by currency for

positions in baht and positions in material currencies. The amount shall be reported in an

equivalent value in baht.

4. For non-material currencies, financial institutions shall prepare a report of

aggregate effects in the Report for Other currencies. The amount shall be reported in an

equivalent value in baht.

5. In converting foreign currency positions, financial institutions shall use

exchange rate as stipulated in the Notification of Bank of Thailand Re: Accounting for

Financial Institution as at the end of reporting month.

6. Any inquiry regarding this report should be directed to the Prudential Policy

Department, Financial Institutions Policy Group, the Bank of Thailand at Tel.: 0-2283-6821,

0-2283-5805 and 0-2283-5804.

B. Definitions

This is a report of interest rate risk measurement on banking book positions for each

currency. Financial institutions shall prepare and report the effects on net interest income

and economic value from increase in interest rate by 100 basis points. In this respect,

financial institutions must include all on- and off-balance-sheet items in various time bands

as well as demonstrating interest rate risk calculation.


-11/9-

“Time band” means residual term until maturity for items with fixed interest rates

and residual term until next repricing date for floating rate items. “Non-rate Sensitive” means items that are not sensitive to change in interest rate.

Items to be reported are categorized as follows. Definitions shall be refered from

those for the Balance Sheet (BLS) Data Element: Balance Sheet Item of the Data

Management System (DMS).

1. “Total assets” means total assets of financial institutions.

2. “Total capital funds” means total capital funds of financial institutions.

3. “Cash” means banknotes, coins and petty cash held by financial institutions

and cash in collection. It shall be recorded in the specified time band.

4. “Interbank items” means deposits, certificates of deposit, loans, margin

loans and net balance debit/credit margin under repurchase agreements from the same

counterparty and the same transaction, including transferred loans not qualified under

accounting standards to other domestic financial institutions in accordance with the Interest

Act of financial institutions and other financial institutions abroad; excluding loans to

suspended financial institutions or those whose licenses are revoked, but including accrued

interest receivables less deferred income, allowance for doubtful debts and allowance for

value adjustment from debt restructuring. The amount shall be recorded in the specified

time band.

5. “Investments (net)” means all types of investments, both debt or equity instruments in the possession of financial institutions or whose rights are transferred but

with repurchasing agreements, as well as investments in transferred loans that are qualified

as purchase under the accounting standards. The recorded amount shall be in net value after

adding or subtracting any allowance for devaluation or diminution of securities in

accordance with the accounting standards, in the specified time band.

6. “Loans” means all types of lending to domestic non-financial institution

borrowers under the Interest Act of financial institutions and other financial institutions

abroad, including being a creditor due to having paid or ordered to pay for the benefits of

former trading partner, all types of payment obligations, hire-purchase or leasing, margin

loans, net debit/credit balance margin under repurchase agreements from the same

counterparty and the same transaction, and loans to suspended financial institutions or


-11/10-

those whose licenses are revoked. The recorded amount shall deduct deferred income in

the specified time band.

Deferred income means income from debtor of hire-purchase or financial lease

contracts or discounted bills not yet recognized as income.

7. “Accrued interest receivables” means accrued interests from loans that

financial institutions record as income but not yet received, excluding accrued interest from

interbank and money market transactions. The amound shall be recorded in the specified

time band.

8. “Allowance for doubtful debts” means money reserved for loans expected

to be uncollectible under the regulations on asset classification and provision of the Bank

of Thailand, including allowance for value adjustment from debt restructuring. The amount

shall be recorded in the specified time band.

Allowance for value adjustment from debt restructuring means amount of

investment in debtors that exceeds the fair value of the debt in accordance with the

accounting standards.

9. “Properties foreclosed” means assets (excluding securities) possessed by

financial institutions due to debt repayment or purchase of assets mortgaged with financial

institutions which are disposed under the court orders, including possession of foreclosed

assets from financial lease or hire-purchase for business purposes or for employees which

are no longer in use, plus assets used in property financing business. The recorded amount

shall be in net value after deducting any allowance for devaluation or diminution of the

properties in the specified time band.

10. “Net land, building and equipment” means land, buildings and equipment

that financial institutions use in business operations or for benefits of staff or employees of

financial institutions. The amount shall be recorded in net value after deducting any

allowance for devaluation or diminution of the assets in the specified time band.

11. “Other assets” means other assets not listed above. The amount shall be

recorded in net value after deducting allowance for devaluation or diminution of the assets

in the specified time band.


-11/11-

12. “Total rate-sensitive assets (RSA)” means aggregate amount of the rate

sensitive assets in each time band.

13. “Deposits” means money deposited at financial institutions or money

financial institutions receive from the public that must be repaid upon demand or at the end

of specified period. The amount shall be recorded in the specified time band.

14. “Interbank items” means deposits, borrowings, margin loans, net balance

debit/credit margin under repurchase agreements from the same counterparty and the same

transaction from other domestic financial institutions under the Interest Act of the financial

institutions and other financial institutions abroad. The amount shall be recorded in the

specified time band.

15. “Borrowings” means all types of borrowings including debenture, debt

instruments, margin borrowings, net balance debit/credit margin under repurchase

agreements from the same counterparty and the same transaction and sales of debt

unqualified as sales under the accounting standards. The amount shall be recorded in the

specified time band.

16. “Other liabilities” means other liabilities not listed in the aforementioned

items. The amount shall be recorded in the specified time band.

17. “Shareholders’ equity” for Thai financial institutions means the difference

between assets and liabilities of the financial institutions. For foreign bank branches, it shall

mean head office’s portion or of other branches of the same entity. The amount shall be

recorded in the specified time band.

18. “Total rate-sensitive liabilities (RSL)” means total amount of liabilities

which are sensitive to interest rate change in each time band.

19. “Net positions before off-balance-sheet items” means the difference

between rate-sensitive assets and rate-sensitive liabilities (RSA – RSL) in each time band.

20. “Net position of nominal amounts of rate-sensitive off-balance sheet items”

means sum of net positions of the nominal amounts of off-balance-sheet items that are

sensitive to interest rate change in each time band. The amount shall be recorded in the

specified time band (sum of item 20.1 and 20.2).


-11/12-

20.1 “Net position of rate-sensitive non-option items” means net position

of the nominal amounts of non-option off-balance-sheet items that are sensitive to interest

rate change in each time band. The amount shall be recorded in the specified time band.

20.2 “Net position of rate-sensitive options” means net position of the

nominal amounts of off-balance-sheet items which are options and are sensitive to interest

rate change in each time band. The amount shall be recorded in the specified time band.

21. “Periodic gap” means sum of net positions before adding off-balance sheet

items in each time band and net positions of nominal amounts of off-balance sheet times in

each time band (sum of item 19 through 20).

22. “Cumulative gap” means sum of net positions in each time band and net

positions of the previous time bands.

23. “Ratio of cumulative gap to total assets (%)” means the ratio of cumulative

gap in each time band to total assets.

24. “Effects on net interest income case” means effects on net interest income

of financial institutions when interest rate changes.

25. “Proportion of 1 year time remaining in effect” means the proportion per

year of the residual term from midpoint of each time band to 1 year where the net position

in each time band is still affected from interest rate risk For example, for 0-1 month, the

midpoint is 0.5 month; hence, the proportion per year of the time band where the net

position in the 0-1 month time band will be affected from change in interest rate is equal

to (12-0.5)/12 or 0.958.

26. “Assumption of interest rate change (basis points or bps)” means changes in

interest rate in each time band within 1 year e.g. setting interest rate to increase by 100 bps

equally throughout the yield curve (parallel shift in the yield curve) within 1 year period.

27. “Effects on net interest income in each time band” means the amount of net

interest income which may be affected by change in interest rates e.g. under the assumption

that interest rate increases by 100 bps equally throughout the yield curve (parallel shift in

the yield curve) within 1 year period, to be calculated by multiplying (1) periodic gap in

each time band, (2) proportion of 1 year time remaining in effect, and (3) assumption of

interest rate change (multiplication of item 21, 25 and 26).


-11/13-

28. “Accumulative effects on net interest income in 1 year period” means sum

of the effects on net interest income in each time band and the previous time bands within

1 year time.

29. “Effects on economic value of equity or EVE” means the economic value

of financial institutions which may change when interest rate changes.

30. “Duration-based weight” means risk weight of each time band which

reflects the sensitivity of the position within each time band to interest rate change within

each time band, for which the risk weight equals the multiplication of proxy of modified

duration and change in interest rate e.g. 100 basis point increase equally throughout the

yield curve (parallel shift in the yield curve). Proxy of modified duration is estimated from

the midpoint of each time band under the assumption of 5% yield according to the BIS

guidelines.

31. “Effects on economic value of equity in each time band (EVE)” means

economic value of financial institutions calculated by multiplying periodic gap in each time

band with duration-based weight of each time band (multiplication of item 21 and 30).

32. “Cumulative effects on economic value” means sum of the effects on economic

value in each time band and the effects in all previous time bands.