Bandid Nijathaworn: Rethinking the role of financial soundness – financial infrastructure and long-term sustainable growth Remarks by Mr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, at the 8th Bank Indonesia Annual International Seminar 2010 on “Rethinking Macroeconomic and Financial Policies”, Jakarta, 22 October 2010. *  *  *  Thank you Chair, Let me begin by thanking Bank Indonesia for the invitation. It is a pleasure to be here. On the issue of financial soundness, it is certainly hard to overstate the importance of a sound financial infrastructure. In normal times, the financial sector plays a critical role in driving the real economy. But during times of stress, having a sound financial infrastructure is all the more important, because it is the viability of financial institutions that typically draws the line between a mild economic setback versus a full-blown crisis. But what are the essential features of a sound financial infrastructure? Let me highlight three key elements that I believe constitute financial system soundness. First is the efficiency aspect. The financial sector must perform its core functions efficiently. To this end, substantial progress has been made in Asian emerging markets, partly by default as globalization and the rapidly growing economies in Asia have raised competition among financial institutions, and also by design given the continuing efforts by the authorities to deregulate and develop the financial sector. Making further headway on these fronts, therefore, should be a continuing process. And I think this is what Bank Indonesia is doing.

As a result of these developments along with the globalization of financial markets, every trading institution has become more exposed to changes all over the world economies and financial markets. This has led all institutions including central banks to develop new processes in their organizations to manage the risks in a more systematic way, although they used to have had implicit risk management practice. Parallel to these developments in risk management, the practice of reserve management by most of the central banks has changed significantly over the last decade. Once characterized by passive short-term investment strategies to preserve principal value and maintain maximum liquidity, many central banks now use a broad range of instruments, extend their portfolio duration and develop performance benchmarks. This increased attention to risk management and new approach to reserve management by central banks has come about not because of any change in central bank missions, but because of the growing recognition that the conduct of core businesses inevitably involve exposure to financial risks and also because of increased attention to the contribution of central bank profits to national treasuries. Advances in financial risk management brought more scope for central banks to consider increasing their portfolio returns together with maintaining the desired level of liquidity, which is the primary target for central banks. 1  BIS Review 38/2000  Then, the important question of how an effective risk management system can be developed, comes out. The answer to this question does not change depending on the objectives and the size of the institution.