Mapping Thailand's Financial Landscape: A Perspective through Balance Sheet Linkages and Contagion

This paper conducts in-depth profiling of players and interlinkages in the Thai financial system based on sectoral balance sheet data and disaggregated supervisory data on banks and mutual funds. Several aspects of Thailand's financial landscape have been documented. We find that financial interconnectedness has risen and become more complex, with the financial landscape increasingly tilted toward non-bank intermediaries. Network topology suggests a segmented landscape, with the presence of a core cluster where key players including households, firms, large domestic banks, and mutual funds of large banks' asset management arms are located, indicating their tight interconnections. Leveraging on entity-level balance sheet profiles, we develop a stress-testing framework that is based on a network model of financial contagion. Two types of shocks are studied. For industry shocks, we find that losses generally propagate via the liability and ownership channel and the reverse liquidity channel. But when the losses are large enough, the fire-sale effects dominate. For bank reputational shocks, we simulate a loss of confidence in major banks via deposit withdrawal and fund redemption. While the overall losses are much smaller than those of industry shocks, these risks cannot be ignored since the mutual fund industry stands to suffer and panic selling could amplify the losses.