Even if not directly, risks could come indirectly via the exposure of their clients, especially in the case of interlinked market and credit risks. The present environment also raises concerns of the close link between financial and reputation risks. Banks or their affiliates, be they fund management or insurance arms, may have sold inappropriate products to clients without doing proper due customer diligence or education. As a result, clients’ losses could lead to either bad assets and credit risk, counterparty risk, or reputation risk for banks if dissatisfied customers generate queue and protest in front of the banks, or even legal risk. In this environment of tight liquidity, and depositors have bargaining power, reputation risk and customer queue and loss of confidence could translate into liquidity risk. This brings me to the third risk implication from this global crisis, which is the liquidity risk. Indeed, tightened global liquidity will be more pronounced for economies that rely on external short-term debt. For other economies, the shift of external funding toward domestic sources and the effect on trading partners’ economies could cause a widespread contraction in credit supply. Furthermore, re-pricing of risks by investors and deleveraging has increased the risks and volatilities in global financial markets, which could in turn lead to greater risk-aversion in emerging markets. As a consequence, there could potentially be more reversals of capital flows from emerging markets, including Asia, thereby denting growth in countries heavily dependent on capital inflows.

Moreover, raising new private capital in this environment is a very tall order; while the option of public capital injection very costly for shareholders and tax payers. Therefore, it is imperative that banks need to be even more vigilant in managing not only their asset quality but also their internal capital, funding, expenditure including executive pay, and dividend policy. Looking at banks in the Asian region, such as Thailand, despite rapid development of capital market in recent years, the core banking businesses remain traditional; largely deposit taking and loan extension. Meanwhile, treasury operation remains relative small. Moreover, with the financial market predominantly bank-based rather than market-based, there tends to be less risk and complication arising from the originate-to-distribute models of securitisation. Nevertheless, in the past few years, banks have expanded business scope, operating as universal banks or financial conglomerate, with securities and insurance arms. Therefore, organisational structure and risk profile, of even the more traditional banks, have become much more complex. This, in turn, demands that bank’s risk management, Board’s oversight, and supervisory framework can match the increasing complexity and ensure adequacy of capital and risk management system on a consolidated basis. On market risk, some banks in Asia and Pacific countries have been exposed to the subprime related assets such as CDOs as well as assets of failed institutions. The losses so far have been limited to foreign assets and are addressed by private and government assistance. On hindsight, this crisis highlights the fact that it is easy to overestimate one’s risk management ability.