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Interview

Thai central bank to scrutinize shadow banking more rigorously

Governor also warns of payment 'fragmentation' as Alipay and WeChatPay spread

Thai central bank Gov. Veerathai Santiprabhob lays out the factors that could imperil regional financial stability. (Photo by Masayuki Yuda)

BANGKOK -- The financial system of the Association of Southeast Asian Nations bloc is increasingly vulnerable to risks from shadow banking, Bank of Thailand Gov. Veerathai Santiprabhob warned in an exclusive interview.

"We have some concerns particularly on domestic financial stability," Veerathai told the Nikkei Asian Review. He said the region's banking system remains sound, with buffers based on the lessons of the Asian financial crisis over two decades ago. But he sees dangers developing in the financial sector outside traditional banks.

"Shadow banking activities have been there all along," the governor said, "but the fact that interest rates have been too low for too long has contributed to the expansion of them because people have been searching for yields."

"Shadow banking covers more than 10% of bank deposits in Thailand," he continued, emphasizing the extent of the risks. About two months ago, Thailand passed a law to regulate credit unions and saving cooperatives, in the hope of curbing shadow-banking behavior.

Veerathai also raised three global factors that need to be watched for the sake of regional financial stability: prolonged U.S.-China trade tensions, the monetary policy directions of developed countries, and Chinese economic growth amid ongoing structural reform.

Thailand is the chair of this year's ASEAN summits, along with meetings of finance ministers and central bank governors. This puts Veerathai in a position to lead the conversation on maintaining a sound financial system. On April 5, the finance ministers and central bankers put out a joint statement from their first meeting of 2019, vowing to seek stability in the face of "heightened uncertainties arising from trade tensions and policy adjustments of advanced economies."

Other challenges stem from the accelerating shift to online finance, Veerathai suggested.

Online banking and QR code-based payments have become the norm across Southeast Asia. Many consumers have bypassed more traditional financial services like offline banking and credit cards. In Thailand, over 70% of internet users do their banking online -- the highest proportion in the world.

Veerathai stressed the importance of pursuing interoperability among such services. "It's very encouraging to see that many ASEAN countries are working toward having the same standardized QR codes," he said. "Thais can now scan QR codes in Singapore for mobile banking."

While new digital payment platforms such as Alipay, WeChatPay, or Line Pay have expanded in the region, the Bank of Thailand has launched its own platform called PromptPay. Similar moves have been seen in Singapore, Malaysia and Indonesia.

The governor explained that PromptPay is an attempt to prevent the Thai payment system from becoming "fragmented" across multiple third-party platforms. Fragmentation will lead to locking customers within certain systems, discouraging innovation and competition, Veerathai insisted. "We want to preserve the values of our payment system," he said.

Cybersecurity cooperation is also a priority. This is not something authorities in one country can handle alone, he said. "It's a cross-border threat."

ASEAN is looking into creating a new information-sharing platform on cybersecurity. "The current platforms appear to be tailored for the private sector more than the regulators," Veerathai said. "Establishing a new platform for the regulators is one topic of the ASEAN financial ministers and central bank governors meetings this year."

Thailand has already acted. Last September, it opened a regional cybersecurity training institute in Bangkok in cooperation with Japan. "We need more people who have a good understanding on how to deal with cyberattacks," Veerathai said.

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