On the benefit side, the market would become more efficient if buyers and sellers of financial products are offered product choices that better fit their risk-return preferences. Nonetheless, there are important risks, and the subprime and CDO problem have brought this to light. In short, the current global turmoil is a sharp reminder of the danger of overestimating one’s own risk management ability. On the one hand, iconic investment banks, giant insurance firms, and market specialists such as rating agencies and bond insurers have, with hindsight, overestimated their ability to price  BIS Review 133/2008  1  and manage complex derivatives. On the other hand, regulatory frameworks also need to be strengthened to ensure that financial institutions have adequate capital and liquidity. Hence, there are calls for strengthening regulations, and I agree that there are many areas such as leveraging and capital requirements that needs to be strengthened. But, I also believe we would do well to approach this in a steady and thorough manner, as regulatory changes need to be considered carefully. Particularly, there needs to be domestic and international harmonization to avoid the sort of harmful arbitrage that has been associated with the current turmoil. Moreover, the current crisis also highlights the truly globalised nature of the financial market, as uncoordinated regulatory measures could cause major difficulty in crisis management. In short, we must ensure that regulations are truly risk-based and nondistortive, on both a domestic and international basis. This requires significant supervisory coordination going forward.

Pillar II is based on five key principles. The first principle is to ensure a robust banking system that is resilient, committed and able to provide a strong foundation to support the Thai economy at all times. In the second principle, banks will be encouraged to reap the economy of scale by promoting voluntary consolidation to promote competitiveness. At the same time, proper competition policy will also be put in place to ensure fair consumer treatment. The third principle aims to promote competition via the liberalization of branch network and business scope and to enhance the roles of existing players, including banks and niche banks, while the fourth principle will consider new entries based on the value added to the economy. Lastly, the fifth principle will focus on enhancing the role of specialised financial institutions in providing increasing access to financial  BIS Review 133/2008  5  services for the low-income and small business groups and reducing the role of the state in commercial banking. Pillar III, on the other hand, will focus on laying down the foundation for a strong and supportive infrastructure for the medium term development of the financial system. This will be done through further enhancing the market and products which will facilitate banks, own risk management, promoting an effective information system and pushing for the amendments of necessary laws to facilitate risk management. Ladies and Gentlemen, The Thai banking system will continue to face new challenges going forward, both from external developments and domestic factors.