Bank of Thailand sets the stage for virtual banking: new supervision rules unveiled

• The bank’s new regulations aim to ensure virtual banks in Thailand adhere to standards set for traditional retail banks while addressing digital-specific requirements.
• Virtual banks must meet capital requirements, operate within a solo consolidated group, and primarily offer services through digital channels.
• During the initial phase, virtual banks can request certain regulatory relaxations from the Bank of Thailand, including appointing managers from other institutions, conducting stress tests, and deferring comprehensive recovery planning.

In September 2024, the Bank of Thailand (BOT) released new regulations that aim to supervise the issuance of virtual bank licences.

Notification Re: Virtual Bank Supervision Criteria aims to ensure that virtual banks in Thailand adhere and follow the regulatory standards that are set for traditional retail banks, alongside additional measures that are tailored to control virtual bank’s digital operations and corporate structure.

What is a virtual bank licence?

A virtual bank license is granted by the relevant regulatory body that permits an entity to operate as a digital-only bank, providing financial services exclusively through digital channels without traditional physical branch networks and relevant services.

What are the requirements in Thailand?

Some of the key requirements that form part of the Notification are as follows:

• Requirements of capital: Should the investment by other financial institutions in a virtual bank elevate the capital fund within the financial system to a potentially unsafe level, thus posing a risk to other financial entities, the BOT may mandate the concerned institution to maintain capital reserves as deemed appropriate.

• Financial group considerations: When a virtual bank is deemed to be a part of a financial institution’s broader business group, it must operate within a solo consolidated group. Other financial institutions and entities within the group are forbidden from extending credit to or performing any lending-related transactions with the virtual bank. Entities within the same group must maintain an autonomous relationship.

• Operational avenues and external partnerships: As part of their services, digital banks must maintain their offering through digital channels. There are, however, various exceptions to the rule, including the utilisation of physical bank branches.

The initial phase

Once the virtual bank becomes operational but is yet to have been granted its licence by the BOT, it will have entered the ‘initial phase’.

Throughout initial phase, the BOT relaxes certain regulatory requirements as follows:

• Governance and operations: During the initial phase, virtual banks might seek approval from the BOT to appoint a manager or an authorised individual from another financial institution to supervise their operations. The BOT will evaluate each request based on its rationale, the necessity of the proposed appointment, and the steps taken to avoid conflicts of interest.
• Conducting stress testing mechanisms: Throughout the initial phase, virtual banks are able to perform either their own self-developed scenarios or supervisory scenarios while conducting stress tests on their operations.
• Comprehensive recovery planning: Within the initial phase, virtual banks are not required to put forth a comprehensive recovery plan to the BOT. A comprehensive recovery plan would detail the virtual bank’s capabilities to deal with financial stresses throughout their operations.

Final thoughts

In conclusion, the BOT’s proactive stance in rolling out the Notification Re: Virtual Bank Supervision Criteria exemplifies its commitment to a forward-thinking, robust, and adaptive regulatory framework that will allow virtual banks to flourish in the country.

This initiative not only aims to level the playing field between traditional retail banks and digital-only entities but also ensures that virtual banks operate with the highest standards of safety, transparency, and efficiency.

As these regulations continue to take effect, they will undoubtedly shape the landscape of digital banking in Thailand, fostering innovation while safeguarding the interests of consumers and the financial system at large.

For any further enquiries on banking law in Thailand, please do not hesitate to reach out to the team at WSR International.