Further Evidence of the Impact of Foreign Bank Presence in Thailand

For foreign investors, market access through locally incorporated banks in Thailand used to be limited to the acquisition of stakes in existing banks not exceeding 24.99% of paid-up registered capital with no new commercial bank licenses having been issued between 1978 and 1996 (Traisorat, 2000, p. 7). Since 1997, however, foreign majority shareholdings have been permitted for a period of 10 years on a case-by-case basis (Bank of Thailand, 1997, p. 25). After 10 years, foreign investors are not allowed to purchase additional shares unless foreign shareholdings amount to less than 49% of total shares. As market access through the establishment of branches remained heavily restricted, further liberalising foreign equity investment in locally incorporated banks following the outbreak of the Thai financial crisis has given foreign banks the opportunity to compete on an almost level playing field for the first time. Four locally incorporated banks have subsequently been acquired by foreign banks in 1998 and 1999, respectively.2 Two of these so-called hybrid banks, however, have already been resold since then: one to a domestically-owned bank, the other to a foreign-owned bank incorporated in Thailand.3 The merger and privatisation of two state-owned banks remain pending.4 Although the latest Financial Sector Master Plan as approved by the Cabinet on 6 January 2004 (FSMP) introduces a new licensing system for domestic as well as foreign banks, it does not address the temporary regulations regarding foreign equity participation in locally incorporated banks. Against this background and in light of the negotiations of free trade agreements such as the proposed bilateral Thai-US Free Trade Agreement, which may include the provision of financial services (Na Thalang & Pongvutitham, 2005; Chantanusornsiri, 2005), this chapter aims at (1) analysing if foreign-owned banks incorporated in Thailand differ from domestically-owned banks incorporated in Thailand and (2) examining the effect of foreign bank presence on commercial banks incorporated in Thailand in terms of the performance measures net interest margins, non-interest income (scaled by total assets), operating margins, personnel expenses (scaled by total assets) and return on assets, given that liberalisation of market access generally proceeds on the premise that foreign entry is beneficial for the host country (see, e.g., Claessens, Demirgüç-Kunt & Huizinga, 2000, p. 117).