prasarn trairatvorakul : trust as a pillar of the industry keynote speech by dr prasarn trairatvorakul, governor of the bank of thailand, at the asian banker summit 2012 “ trust as a pillar of the industry ”, bangkok, 26 april 2012. * * * ladies and gentlemen, it is an honor to join all of you today, and to welcome leaders of asian banking community to bangkok. the theme of this year conference, “ trust as a pillar of the industry ”, highlights the fact that the global financial market stands at an important cross - road. the topic of trust inevitably arises after a crisis. the cross - road is about how to reform regulation, that is, how to re - regulate. this is the juncture which we have reached today, with reforms proposals such as those by the basel committee, the financial stability board, or dodd - frank act in the us. all these are attempts to rebuild trust and confidence. it is well known that trust is the cornerstone of the financial industry. but it should also be added that, trust alone is not enough. we also need to have a good dose of healthy skepticism. the reason for this is that we must avoid, on the one hand, overly trusting market mechanism, or on the other hand, overly trusting in regulation. this is because of the rapid changes in the financial system and how risk is transmitted. the last crisis showed how financial innovation and complexity of bank business model overtook risk management and regulation in the west. in asia, economic and financial liberalization is a powerful driving force that is reshaping our financial landscape today. this could potentially open up the gap between risk and our ability to manage it. so what should be our strategy to build trust, but avoid being blinded by our sense of security? the strategy to deal with this is to have trust that is counter balanced by well informed debate on risk management, supervision, and good governance. so, we need a good dose of well - informed skepticism, as well as financially literate public. let me turn to the progress on the global efforts to reform regulation. where are we today? in all of these reforms – be they basel or fsb – the questions we ask are these. have we done enough to rebuild “ trust ” and secure financial soundness? is the international standard right for the local context? are there unintended consequences, i. e. the bad side - effects? getting it right

system, and strong governance. asia ’ s simpler banking model, and reforms to strengthen bank risk management and risk - based supervision, help to foster a strong first line of defense. but as i mentioned earlier, we would risk false sense of security if we believe we can depend just on our simpler banking model. with economic and financial liberalization, especially propelled by the regional economic integration such as asean economic community or aec, that simpler banking model is changing. i will return to this issue later. for now, let me return to basel iii and the potential side - effects for asia? there are some concerns about unintended consequences from basel iii that bankers and regulators in asia have voiced to the standard setters. i will, at this time, not comment on those issues which are not concluded such as liquidity rule. one of the most important and immediate consequences would be impact on trade finance which is a critical issue for emerging economies and asia. this is because our economies and financial structure is more dependent on it, compared to some western economies. let me elaborate. international trade is a major driver of gdp as our export is part of the global and increasingly integrated regional supply chain. however, many of our exporters are smes not large conglomerate. these local smes rely on bank financing, as our financial system remains more bank - based than market - based. supplier of trade financing is still banks in western countries, especially european banks. the deleveraging of european banks can reduce the supply of trade financing and impact growth and development. to address this, it is important that basel committee recognizes that trade financing has relatively large impact on asia, compared to the western economies for which basel iii is mainly geared. treatment of trade financing in leverage ratio framework will create incentive for banks to shift away from trade financing towards other types of financial transactions, including derivatives which have lower impact on leverage ratio, but can earn higher return. this is because they are assigned lower credit conversion factor even though trade financing is less complex, more familiar, has low liquidity risk as they are self - liquidating, and most importantly, it clearly serves real sector. we believe these rationales argue for a more appropriate treatment of trade financing to ensure that the basel iii framework is appropriate for asia. the current effort of fsb to survey unintended consequences of reforms on emerging market is welcomed. bis central bankers ’ speeches before ending this note on basel iii, let me touch on thailand ’ s own take on these