Thus, such provisions should act as a countercyclical mechanism for accumulating additional provisions when conditions are good and releasing or allocating specific provisions when the times turn bad.” The regulations on required credit risk provisions also introduce some macroprudential aspects as they establish that these must be forward-looking and based on the expected probability of future repayment, not the current level of default or delay, and consider the sensitivity to the cycle of the industry where the debtor operates. In addition, regulations establish a minimum level of provisions that does not vary with the cycle and prevents them from falling excessively during favorable cycles of payment behavior. Finally, after the crises that hit emerging economies in the late 1990s, the law ruled that banks, when assessing the financial situation of the debtors, must consider their currency, term, and interest rate mismatches. The Central Bank’s legal framework also includes a number of powers that can be used to mitigate excessive credit cycles if deemed necessary. For one, the Central Bank Board has the authority to establish reserve requirements over foreign exchange operations. This tool was used in the past (1990s) to control capital inflows to Chile and their impact on macro balances. However, our practical experience with the use of this tool in the 1990s taught us that its success in taming capital inflows is limited because it is always possible to find ways to circumvent the restrictions.

In this regard, the Bank of Thailand meets with external auditors at the beginning of each year, in order to exchange views on common areas of concerns and to gain greater insights on the planned audit scope for the coming year, for example, the quality of risk management, the reliability of assigned collateral and foreclosure values. In addition to ongoing meetings with external auditors, there are periodic discussions at the agency level between the Bank of Thailand and the accountancy bodies. Regularly, the Bank of Thailand seeks comments from the Institute of Certifed Accountants and Auditors of Thailand prior to the issuance of new regulations. Likewise, the Bank of Thailand’s supervisors are regularly invited to be a member of the auditing standard committee whose responsibilities involve the development and improvement of Thai auditing standards. In summary, the Bank of Thailand has signifcantly benefited from the increasing coordination between supervisors and external auditors. Despite these benefts, there are several challenges ahead in our relationship with external auditors that merits careful deliberation. First, supervisors should be sensitive to the independence of the external auditors, particularly when the auditors provide various types of consulting services to the bank, which often times may be far more lucrative than external auditing fees. In Thailand, the Ministry of Commerce released a ministerial regulation in 1991 to prohibit external auditors from providing auditing services to any entities where their independence cannot be maintained. However, this regulation still leaves the assessment of independence to the external auditors themselves.