4 Among the key lessons are: •  the critical importance of liquidity, alongside capital, in managing and regulating banks;  •  the limitations of the models which underpin the valuation and rating of structured products;  •  the importance of disclosure on risk exposures and valuation practices for the maintenance of confidence and effective market functioning in times of stress;  •  the need to alter the adverse incentives that had developed in the distribution chain for mortgages including for originators to maximise the volume of loans, for the  2  Arguably the cash flow projection of losses of $ billion comes closest to the sort of provisions banks would be making if the loans had been held on their banking books rather than securitised and sold on. On that basis the losses currently projected would be only 50% of the Savings and Loans losses as a share of US GDP. 3  See “Financial stability and depositor protection: strengthening the framework”, Consultation Document, January 2008. http://www.bankofengland.co.uk/publications/financialstabilityanddepositorprotection080130.pdf  4  Private sector initiatives have also been launched. There are European industry plans to compile information on a variety of instruments including ABCP, ABS and CDO and to disseminate this to investors and other interested parties on a regular basis. See “Summary of European Industry Commitments to the European Commission regarding Transparency in the European Securitisation Market” (www.europeansecuritisation.com/Industry-letter-08Feb08.pdf). The Institute of International Finance (IIF) also has an active agenda of work, covering risk management, liquidity, valuation, ratings, and transparency. (See http://www.iif.com/press/press+releases+2007/press+46.php).

First, we aimed to make these financial institutions healthy and profitable so as they could resume their normal function of financial intermediaries. In 2001, the Bank of Thailand issued a few measures and guidelines to enhance banks’ profitability; for example, the reduction of provision requirement for a normal loan which is not NPL to a more reasonable level and the classification of NPLs by account was introduced to replace NPLs by name. More important, banks were persuaded to change from the old practice of competing for deposits with higher interests which resulted in lowering the cost to support banks’ profits. Moreover, banks also have made substantial progress on productivity and risk management, with restructured work process that has significantly brought down operating costs. As a result, return on assets has improved from negative in 2001 to 0.7 percent in 2003 and the annualized rate of 1.5 percent for the first half of this year. At the same time, good progress has been made in NPL reduction. The proportion of outstanding NPLs to total loans has reduced from 24.5 percent in 2000 to 12.4 percent at the end of 2003 due to various efforts put to restructure NPLs. Now, with improved balance sheets and more stable financial standing of all banks, the Bank of Thailand has moved into the second step; and that is to improve the quality of banks’ businesses and management. The Bank of Thailand has recently tightened provisioning rules for NPLs.