1. Commercial Banks and Monetary Policy in Thailand by Kobsak Pootrakool

2. Plan of Presentation  Banks’ heterogeneity and monetary policy  Bank soundness and monetary policy  Future challenges -- changing banking and financial systems and implications on monetary policy

3. Baseline Simulation of Monetary Transmission Mechanism 1.01.01.0 0.0 0.2 0.4 0.6 0.8 1.0 123456789101112 Deviation from base (Percentage Point) 0.5 0.6 0.6 0.6 0.7 0.8 0.0 0.2 0.4 0.6 0.8 1.0 123456789101112 Deposit rates Deviation from base (%) Quarter Deviation from base (%) Quarter -0.9 -1.3 -1.4 -0.3 -0.5 -0.6 -0.3 -1.5 -2.1 -2.5 -2.0 -1.5 -0.5 0.0 0.5 123456789101112 Private Credit Consumption Investment GDP Domestic Demand Lending rates

4. Banks’ Heterogeneity: Lending Structures

5. Banks’ Heterogeneity: Market Shares

6. I. Banks’ Heterogeneity and Monetary Policy  Changing monetary conditions can have different effects upon different commercial banks  Large and liquid banks will be less effected than small banks  Large customers/firms will be less effected than small customers/firms

7. Typical impacts of changing monetary conditions on banks’ balance sheet Response of LSECUR to LM0 Response to One S.D. Innovations ± 2 S.E.

8. Large Banks v.s. Small Banks Effect on Securities holding Quarter Effect on Loans Small ____ Large …… Small ____ Large ……

9. Large Customers v.s. Small Customers Sale differences Sale small firms Sale large firmsInv. large firms Inv. small firms Inv. differences

10. II. Bank Soundness and Monetary Policy  Banks perform critical tasks in the economy  The recent banking crisis has hampered the role of the commercial banks as a main medium to transmit monetary policy  This argues for proper prudential regulation policy by the central bank to ensure the effectiveness of monetary policy

11. Roles of commercial banks in the monetary policy transmission Exchange rate Monetary instruments Asset prices Credit availability Expectation Domestic demand Import prices Inflation and output External demand S-T rates L-T rates

12. Linkages between short term rates and commercial rates (MLR) 0 10 20 30 40 92939495969798990001 Recursive C(1) Estimates± 2 S.E. -0.2 0.0 0.2 0.4 0.6 0.8 92939495969798990001 Recursive C(2) Estimates± 2 S.E. -2.5 -2.0 -1.5 -0.5 0.0 0.5 92939495969798990001 Recursive C(3) Estimates± 2 S.E. -0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 92939495969798990001 Recursive C(4) Estimates± 2 S.E. Libor rateInterbank rate Deposit rate 3 monthsConstant term

13. Less stable money supply relationship 0.0E+00 1.0E+06 2.0E+ 3.0E+ 4.0E+ 5.0E+ 6.0E+ 0.0100,000.0200,000.0300,000.0400,000.0500,000.0600,000.0700,000.0 Money Base M2

14. Liquidity within the banking system 1996 1998 2000 RP17,493 356,449 154,990 Government Bonds17,895 154,192 271,393 Private Securities90,126 104,161 176,378 Non-resident Banks179,985 462,497 720,057 Total305,4791,077,2991,322,818

15. III. Future challenges: Changing banking and financial systems and monetary policy  Similar to unsoundness in the banking sector, changing financial landscapes can reduce the effectiveness of monetary policy  The list includes issues such as - Financial innovation - Closer financial integration - Entry of foreign banks, etc.

16. Ensuring the effectiveness of monetary policy  Distributional impacts of monetary policy  Bank soundness  Evolving financial structures  Conduct detailed analyses to complement the macro-model  Maintain appropriate prudential regulation  Institute a long-term development policy At least 3 Measures3 Issues

17. Conclusion  An integrated approach is required by the central bank in dealing with commercial banks to ensure effectiveness of monetary policy  These include (1) the appropriate prudential regulation and (2) a long-term development plan for the financial sector  Both will complement our ongoing work to improve the framework of monetary policy conduct and will provide foundation for a sustainable development

18. “ ธนาคารพาณิชย์ก็คล้ายๆ กับ เครื่องมือของธนาคารชาติ เมื่อเรา ไม่รู้จักเครื่องมือดี หรือว่าควบคุม เครื่องมือไม่ได้ หรือว่าเครื่องมือขี้ เท่อเต็มที่ การที่จะเลือกใช้ นโยบายอะไรก็ไม่มี ประโยชน์ ……. ” Conclusion (cont.)