Risk Behavior of Thrift and Credit Cooperatives under Prolonged Low Interest Rates: The Case of Thailand

Abstract

This paper examined the risk-taking behavior channel of Thrift and Credit Cooperatives (TCCs) of Thailand under prolonged low interest rates. In this study, TCC risk behavior is explained by variables from TCC financial statements: such as deposit ratio, loan ratio, investment ratio equity ratio and liquidity ratio; macroeconomic variables: such as GDP growth, inflation; dummy variables for TCC characteristics such as size; and policy environment: such as policy rate low rate in dummy variable form; including interaction terms between size and characteristics: such as low rate and characteristic variables. One-period lagged characteristic variables were used to avoid heterogeneity problem. This study used firm level data from the Cooperative Auditing Department of Thailand from 2008-2017. Other macroeconomic data were from CEIC database and Bank of Thailand. Methods employed included fixed effects model and quantile regression. The study results were that under prolonged low interest rates, TCCs may take more risk, of which this study emphasized two risk proxies: Z-Score and leverage ratio. During low interest rates time, TCC members would save money in form of equity instead of deposits as equity paid dividend higher than deposit interest rates. As a result, TCCs had seemingly costless fund to lend and invest. Low cost and low interest income under prolonged low interest rates may contribute to higher risk captured by Z-Score. Furthermore, larger TCCs may also had higher negative impact of equity on risk, relative to smaller size TCCs. Being able to acquire more equity during prolonged low interest rate time, Larger TCCs may have a cost advantage and, therefore, merging between large TCC and small TCC could improve TCC stability. However, merging creates a larger size of TCC which stimulates misappropriation in TCC. To reduce the chance of misappropriation in TCCs, criminal penalty should be escalated to the same level as in the case of commercial banks.