A dogfight and tougher bank standards

Risk-based supervision has become the principle adopted by the central bank to prevent credit, market and other woes.

It has also implemented the new International Accounting Standard 39, which requires banks to set aside sufficient reserves after acknowledging debtor's cash flow in terms of net present value.

A Deposit Protection Act has been passed to ensure deposi-tors get their money back to a certain amount if a run on a bank occurs, as happened dur-ing the 1997 crisis.

The BOT knows dealing with depositors is not easy. It teaches regulators a story about "biting dogs" to illustrate how sensitive depositors about banks.

The story is about two dogs fighting in front of a bank, attracting a group of curious people. The crowd of onlookers leads passers-by to think people are lining up to withdraw their deposits. This sparks a rumour the bank is going bankrupt, scaring depositors so much they rush to pull their money out.

The point of the story is retail depositors are very sensitive to situations that may be entirely innocuous.

What we don't know is what solution the trainers give the regulators. Are they told to restore depositors' confidence or to beat the fighting dogs?

Anoma@nationgroup.com