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regulatory framework, albeit as Table 10 illustrates, BoT failed to bring it closer in line with global best practice (especially in the area of loan classification and loan loss provision guidelines, concentration and exposure ratios and limits on connected lending). Moreover, the finance company sector remained more lightly regulated than commercial banks despite the fact that these companies engaged in similar activities (but in riskier market segments) as banks.

**Table** 10. **Changes to the Regulatory and Supervisory Framework**

|**Date**|**Measures**|
|---|---|
|1993/January|**_a_**<br>Imposing BIS capital adequacy standards on commercial banks. Initially minimum<br>capital-to-risk-asset<br>ratio set at 7 percent for domestic banks and 6 percent for foreign<br>banks.|
|1993/Decembe|r**_*_**<br>Increasing minimum capital-to-risk ratio to 7.5 percent for domestic banks and to 6.5<br>percent For foreign banks.|
|1994/June|_e_<br>Imposing net foreign exchange position limits on finance companies (25 percent on<br>overbought side and 20 percent of tier I capital on oversold side)<br>**_a_**<br>Increasinig minimum reserve for doubtful debts of commercial banks from 50 to 75<br>percent.|
|1995/March|**_*_**<br>Commeicial banks have to submit details of their risk managemen**t**o BoT.|
|1995/Decembe|r**_*_**<br>IncreasinIg minimum reserve for doubtful debts of commercial banks from 75 to 100<br>percent.|
|1996/May|**_*_**<br>Imposition of 100 percent provisioning requirement against doubtful loans for finance<br>companies, finance and securities companies, and credit foncier companies.|
|1996/October|**_*_**<br>Increasirng<br>the first tier capital fund to risk asset ratio of commercial banks from 5.5<br>percent to 6 percent.<br>* Increasirtg the overall capital-to-risk asset ratio of finance companies to 7.5 percent<br>(equivalen**t**o commercial banks).|
|1997/March|**_*_**<br>Further strengthening of the loan loss provisioning requirements.|
|**_Source:_**Bank of Thaila|nd, Financial Instiutions and Markets in Thailand, 1998.|

# 3. **Conclusions**

Private capital flows validated and exacerbated the domestic macro cycle in Thailand, and despite efforts to the contrary, led in several instances to overheating pressures as manifested by the growing current account deficit and rising inflation. More importantly with regard to vulnerability, however, was that the policy mix created incentives for large current account deficits tc be financed through the rapid build-up of short-term, unhedged, external liabilities. The macro policies that jointly contributed to vulnerability in Thailand were:

- **_Monetary policy_** _stance._ Monetary policy during 1993-96 was becoming less effective as an instrument to deal with overheating and capital inflows, and was in fact encouraging further inflows, by raising domestic interest rates, and the accumulation of short-teim liabilities.

- **_Exchange rate_** _policy._ By allowing the nominal exchange rate to only fluctuate in a narrow band and by not permitting it to appreciate, Thailand's exchange rate policy contributed to vulnerability most importantly by encouraging both short-term and unhedged borrowing by r educing the perceived exchange rate risk. If authorities had been more flexible and had permitted the nominal exchange rate to appreciate,