By re-regulation, I don’t mean the return to tight control by regulators, but rather “smarter” regulation that focuses on systemic risks. Let me show my point with some examples. As a regulator, I would not be doing my job if I did not talk about Basel III. To avoid going overboard on its massive details, I will highlight just a few of its key features. In a nutshell, there are three parts to Basel III: capital requirement, liquidity risk management, and supervision of global systemically important financial institutions. Of the three, the capital part is in the most advanced stage with national implementation started last year in many countries including Thailand. It is expected that by 2019, most countries will be in full compliance with Basel III capital standards which include a countercyclical capital buffer that varies with credit cycles and a leverage ratio that limits excessive buildups of leverage. The liquidity part is new and aims to strengthen banks’ management of liquidity risk. A stress-test-based liquidity coverage ratio and a longer-term net stable funding ratio will be mandated in 2015 and 2018, respectively. The final part of Basel III deals with supervision of global banks whose failure could trigger the meltdown of the global financial system. Identified global systemically important banks will be subject to an additional capital surcharge above Basel III capital requirement. This extra loss absorption capacity is to be met with common equity and will be phased-in between 2016 and 2018.

Ladies and Gentlemen, The global financial crisis that erupted in 2008, or 2007 if you count the U.S. sub-prime crisis as its first incidence, has brought fundamental changes to how central banks approach economic and financial stability. In particular, the crisis has led to a general reorientation of central bank policies in three major directions. The first is the reorientation of monetary policy to take into account financial stability concerns. The second is the shift from “deregulation” to “re-regulation”. And the third is the supplementation of traditional microprudential regulation with macroprudential one. In the realm of monetary policy, the pre-crisis consensus was that the attainment of price stability, or low and stable inflation, was enough to ensure a smooth progress of the economy. While central banks were well aware that financial disruptions could have a serious negative impact on the economy, they were of a view that financial stability was the job of prudential regulation and that monetary policy should focus on inflation and output stabilization. The dichotomy between monetary policy and financial stability policy was well observed across the central banking community. Central banks like the Bank of Thailand, which also looks at financial imbalances when making monetary policy decisions, represented only a small minority before the crisis. The global financial crisis has prompted a fundamental rethinking of central banks’ monetary policy conduct. Now it is recognized that price stability alone does not guarantee economic and financial stability and that there exists an intricate relationship between monetary policy stance and financial stability.