In addition, active and widespread use of foreign currency hedging instruments is also beneficial to mitigate the negative knock-on effects from exchange rate volatility. Liberalization of outward investment by domestic investors also helps promote more balanced capital inflows and alleviate upward pressure on the exchange rate. These international asset holdings can provide a buffer when domestic market faces rigorous tests of volatility. Nevertheless, liberalization needs to be well planned, timed, and sequenced in order to ensure that its benefits outweigh costs. The appropriate degree of liberalization for a country at a given time depends on its specific circumstances, notably its financial and institutional development. More stable and long-term flows, particularly direct investment flows, should be liberalized prior to short-term portfolio flows, which are more volatile and sensitive to cyclical factors. In October 2012, the BOT launched the Capital Account Liberalization Master Plan. This was part and parcel of our longer-term plan to facilitate Thai companies to diversify their investments abroad, especially in neighboring countries. This would encourage private companies to operate their businesses more efficiently by expanding their markets and production bases. In turn, such diversification will help strengthen their competitiveness and absorptive capacity. At the other end of the spectrum, limiting leverage in the banking system would add more cushions to the economy against external shocks. Last but not least, developing fundamental economic strengths to enhance countries’ resiliency to external shocks can work through well-diversified export items focusing on high value-added products.

However, regarding loans for housing, policy tools such as Loanto-Value or Debt-Service-to-Income (LTV or DSTI) ratios, need to be part of the macroprudential toolkit in order to effectively reign on or, at least, influence real estate asset prices, as these are among the most important drivers of the financial cycle. The announced revision of the CRDIV/CRR should provide an opportunity for the extension of the available instruments, as LTVs and DSTIs are not included in the current EU regulation. Clearly, measures addressing the credit supply side by banks – such as increased capital requirements, counter-cyclical capital buffers or dynamic provisioning – can be easy to activate but have proven to be of modest effectiveness. Furthermore, as non-banks play an increasingly important role in the provision of credit, measures targeting only the banks could just result in shadow-banks taking a considerable size of the mortgage business and fuelling a boom in house-prices. Fourth, stress tests of the banking and financial system must have a macroprudential dimension. Such comprehensive assessments need to be embedded in a macro-financial environment. They entail an assessment of the position of a specific economy in the financial cycle since, for example, the adequate level of capital requirements cannot be dissociated from a country’s position on the cycle. Fifth, macroprudential policy is complementary to monetary policy and should share the same status as a policy area. Central banks must have responsibilities in both policy areas even if they are not involved in microprudential supervision. Several reasons justify this set-up.