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Published on November 20, 2007

The Bank of Thailand (BOT) has tightened regulations governing commercial-bank investment in collateralised debt obligations, or CDOs, following balance-sheet fallout from the US sub-prime mortgage crisis.

The new regulations cover capital, accounting standards and risk management. They will improve the banking system's risk-management and accounting standards in CDOs, amid volatile global financial markets.

The impact from the crisis in CDOs has so far made risk-adverse foreign capital shun emerging markets, including Thailand. Yesterday, the principal local stock-market index fell 2.11 per cent to 831.14.

According to the BOT, banks could invest in synthetic CDOs backed by government bonds or with debt instruments rated no lower than double-A. Financial instruments must be rated by "reliable" agencies.

Previously, banks were permitted to invest in CDOs rated no lower than triple-B. There was no rating requirement for debt instruments backing the obligations. If CDOs were later downgraded to below triple-B, banks needed board of directors' approval to hold on to the investment.

Now, before buying CDOs, banks must evaluate the fair value of their existing CDOs and other complicated financial instruments, credit derivatives and hedging instruments.

If existing investments show a net loss, banks must then turn to capital. They can buy additional CDOs only when capital is not below the legal requirement and there is sufficient to purchase the instrument.

Previously, the BOT required banks only to fully count CDOs in risk calculations

"Banks must regularly evaluate the fair value of their CDOs and take into account net losses on capital in the next accounting period. If banks have lower-than-required capital, they must follow policy and procedure, including reporting to the BOT," the notification said.

According to the BOT, banks must consider which factors influenced changes in reference assets. They have to analyse short-term and long-term risk trends and factors.

Bank boards must establish and approve investment policies, strategies and risk management. They must clearly identify the scope and type of transaction, including investment ceilings, it added.

Risk-management policies and strategies must include structure, responsible persons, systems and risk ceilings, such as stop-loss limits.

Banks must classify and book CDOs in line with international accounting standards. Banks already invested in CDOs must bring these into line with the new regulations by next year.

Anoma Srisukkasem

 The Nation