In nearly all cases considered to date, this leads to the conclusion that expectations of economic agents are identical or will converge over time. While this approach has given us invaluable insights in a multitude of models and applications, it faces a major empirical problem: in practice, economic agents hold widely  1  Guiso, Jappelli, and Terlizzese (1994). 2  Guiso and Parigi (1999). 3  Manski (2002). BIS central bankers’ speeches  1  differing views about the future path of economic variables, as I will illustrate throughout these remarks. Thus, recent research has focused on alternative assumptions regarding the nature of expectations held by economic agents. Measuring subjective expectations directly can inform our modeling assumptions on the information sets available to agents, and on the nature of the expectations formation and updating process.4 There are many Bayesians in the audience today. However, for the benefit of those who are not as familiar with Bayesian terminology, let me quickly define what I mean by “subjective expectations” or beliefs. This term refers to the personal probability distributions that individuals hold over uncertain events. Apart from the laws of probability and rules about how beliefs are updated with the arrival of information, there are no restrictions on these probability distributions, hence the use of the word “subjective.”5 Further, individuals might act according to their subjective beliefs without being able to fully articulate in standard forms their underlying probability distribution. Thus, a need arises to elicit these views in order to understand behavior more fully.

Improved from Basel I, Basel II provides guidelines for maintaining capital for more comprehensive types of risks. Under Pillar 1, as you know, banks are required to maintain minimum capital for operational risk in addition to market and credit risks as previously required. And on top of the minimum capital, additional capital may be recommended by national supervisors under Pillar 2 for risks not covered by Pillar 1. Because Basel II will be imposed on a wide range of financial institutions with different sophistications, the framework offers several approaches to calculate minimum capital, ranging from a simple factor multiplication approach to model-based methodology. Obviously, we as supervisors, expect complex financial institutions to adopt the model-based methodology for a better measurement and assessment of risk. One important point I would like to stress here is that Basel II should not be viewed as merely a capital calculation methodology. Rather, it should be seen as a principle-based guideline for sound risk management. This is because Basel II’s advanced approaches are derived from the best banking practice. It is, therefore, a vehicle for better risk management. Banks in emerging markets, including here in Thailand, should, therefore, take advantage of this opportunity to improve their operations. From the perspective of financial information, it is also necessary for banks to produce good quality financial statements so that stakeholders will be well-informed, and a sound judgment on their financial status can be made by the market.