In this context, macroprudential measures constitute only one of the many policy tools that will have to be used. Let me now turn specifically to macroprudential policies. One noted feature of the approach to deal with capital flows in the current cycle is the recognition that an effective and responsive prudential framework can help contain the build-up of financial risk and vulnerabilities that a boom in capital inflows typically generates. This includes the use of “microprudential” instruments to help keep individual banks strong, or to seek to contain system-wide risk through “macroprudential” measures. Policy tools to serve both purposes are many: all of which aim either at moderating procyclical financial behavior or at enhancing the banking sector’s resilience to shocks on both the asset and the liability sides. Drawing on Thailand’s recent experience on macroprudential policies, I would like to make three comments. First, it is important, in the context of public communication, to make a clear distinction that macroprudential measures are different from capital controls. Technically speaking, macroprudential policies apply to the calibration of regulatory measures from a system-wide perspective to dampen procyclicality arising from the interplay between the business cycle, the financial cycle, and risk-taking behavior of economic agents. Given such interpretation, measures to curb or discourage capital inflows should be considered as capital account measures and not macroprudential. For example, Thailand’s recent measure to reimpose withholding tax on non-resident investment in the bond market is a policy to discourage capital inflows. Second, macroprudential measures work by reducing systemic risk across the financial system.

Bandid Nijathaworn: Macroprudential policies and capital flows – managing under the new globalization Remarks by Mr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, at the Conference on Macroprudential Policies, organised by the People’s Bank of China (PBC) and the International Monetary Fond (IMF), Shanghai, 18 October 2010. *  *  *  Thank you Chair, First, let me thank the PBC and the IMF for the invitation. It is an honour to be here, and to be given the opportunity to share my view on this panel. Given time limitations, and the fact that capital flows are important developments in the region at this time, I want to use this opportunity to discuss three issues. The first is the context of the current capital flows to Asia. The second is managing capital inflows and the role of macroprudential policies, where I will draw on Thailand’s recent experience. And the third is my view on what we need to do to deal more effectively with the capital flows challenge. At this time, capital inflows to Asian emerging markets have been large and persistent, posing challenges for policy. The first challenge involves a macroeconomic dilemma that centres around the tension between appreciation pressures, inflation development, and growth prospect. The second stems from financial stability concerns associated with potential build-ups of macroeconomic imbalance, risk of asset price bubbles, and the possibility of an abrupt reversal of inflows.