prasarn trairatvorakul : navigating through volatility with long - term focus speech by dr prasarn trairatvorakul, governor of the bank of thailand, at the association of international banks ( aib ) dinner speaker series, bangkok, 29 july 2013. * * * excellencies, distinguished guests, ladies and gentlemen, i would like to thank the association of international banks for inviting me to give a talk this evening. it is my honor and pleasure to be here for the prominent institution that has its presence in thailand since 1996. the association ’ s work and efforts have contributed significantly towards the strength of the thai banking system as well as economic prosperity here in this country. for this special evening, i would like to share with you my views on the recent economic and financial challenges, as well as the bank of thailand ’ s role in safeguarding economic and financial stability. navigating through volatility over the past few years, we have gone through many economic surprises. last year alone the thai economy had to face several challenges, both inside and outside thailand – recovering from the devastating floods and coping with fragile global economy. and just a few months ago we only just started talking about a pick - up in global growth, driven mainly by robust demand in emerging markets. today, circumstances have changed, and we are facing with unexpected slowdown in emerging markets as well as the prospect of fed qe tapering. as far as global economic environment is concerned, i think we are going to see a lot more surprises. the world, in my view, is now obsessed with just a few things. i would like to highlight them in turn. first, the prospect of qe tapering is having wide implications for financial markets. we have already seen a sell - off of emerging market debts and equities, and a reversal of foreign capital flows that had rushed into the region earlier this year. with uncertainty in the amount of global liquidity provided by major central banks like the fed, we will likely see more volatile capital flows, exchange rate and commodity prices going forward. second, financial markets are watching closely abe ’ s plan to revive the japanese economy. its effectiveness, especially of its third - arrowed plan of structural reform, will be significant for global outlook and the degree of risk aversion in general. if the third arrow has failed before it even properly began, the economic momentum running by the previous arrows – monetary and fiscal

, the establishment of an euro area resolution fund, funded by ex ante private sector contributions, is an avenue that could be considered. such a fund could both mitigate the systemic impact of bank failures and help to solve the burden sharing problem, which could allow a swift intervention in a crisis. naturally, clear, stringent and properly communicated conditions for the use of the fund would be a crucial component of the scheme, outlining that any form of bail - out is to be excluded. on a more fundamental level, moving towards a true euro area regime of supervision and crisis resolution requires a stronger concept of the euro area as a legitimate entity requiring separate treatment. prior to the crisis, this concept was underdeveloped. since the crisis, a stronger focus on the euro area has been evident in, for example, the meetings of the european council in euro area composition and the agreement of the euro plus pact. ultimately, to give the euro area dimension real impetus requires a permanent political centre of gravity. in my view, institutionalising the european council in euro area format would go a long way towards creating the specific economic governance concept that the euro area merits. fifth : involvement of central banks in financial stability finally, a comprehensive discussion on how to ensure financial stability within the economic governance framework should, of course, also look closer to home and to the proper involvement of central banks. one of the most important lessons from the financial crisis is that ensuring price stability is necessary but by no means sufficient for financial stability. the conventional wisdom of central banking that prevailed before the crisis – the jackson hole consensus – had not foreseen that price stability and financial stability could be de - linked, if only occasionally. consensus had solidified on two axioms. first, stabilising inflation would be a sufficient prescription for overall stability. the second axiom was largely a consequence of the first : central banks should only pick up the pieces after the bubble had burst, in those rare cases in which the central bank had failed to check the bubble in the financial exuberance phase, because of inattention for inflation or because of other factors occasionally blurring the connection between the markets, demand and inflation. the large output losses during the financial crisis have clearly demonstrated that for policymakers to intervene ex post is suboptimal. and the financial distress accumulated before the crisis was just too colossal to be attributed to insufficient attention for inflation on the side of central banks. a more plausible explanation is that an exclusive focus on