bank ’ s valuation of collateral plays a key role in protecting the bank against loss in the event of a counterparty default. where available, the bank uses market prices to value a security. where no market price is available or those that are available are judged to be unreliable – for example because they are out of date – the bank calculates a model price to value a security, based on a standard bond pricing model of discounted expected future cash flows. the bank uses its judgment to assess the validity of that model price, including by comparing it to similar traded securities where available, and drawing on any relevant market intelligence it has gathered from market participants. haircuts the bank ’ s haircuts are designed to reduce the likelihood that the bank would incur a loss if forced to realise and liquidate collateral in the wake of a counterparty default. so the haircuts not only have to protect against the risk of counterparty default ( credit risk ), but also take account of the likely value of that collateral in stressed liquidity conditions ( market risk ). as a result, the bank adopts a graded approach, with “ base ” haircuts varying by the type of collateral offered reflecting the different associated risk characteristics. it includes the likely correlation of risk e. g. that the value of a counterparty ’ s collateral will fall as the counterparty itself becomes stressed. over and above those base haircuts, and where appropriate, the bank imposes idiosyncratic haircut add - ons, based on both the type of collateral and the counterparty. in some cases, that reflects stress tests applied to the underlying assets. bis central bankers ’ speeches changes in market prices can, of course, affect the value of the collateral the bank has taken in its operations. as a result, the bank calls margin on any shortfall. 8 in its sterling operations, the bank calls margin daily and is moving to that standard for all other transactions. limits the bank also manages the risk on its balance sheet using concentration limits. those serve two purposes. first, they help the bank diversify across institutions – for example, counterparties can only bid for a maximum of 30 % of the funds on offer in the bank ’ s iltrs. that helps ensure that any single counterparty doesn ’ t corner the market for reserves ( intentionally or by accident ). second, they help diversify across instruments in the wider collateral pool – for example, the bank requires that the adjusted

prasarn trairatvorakul : thai monetary policy in the environment of excess global liquidity speech by dr prasarn trairatvorakul, governor of the bank of thailand, at the thailand focus 2011 – enhancing thailand ’ s competitiveness over the next decades, bangkok, 28 march 2011. * * * ladies and gentlemen, it ’ s an honor to speak before you today at the thailand focus conference. early this morning you heard prime minister abhisit vejjajiva speak on thailand ’ s competitiveness ; and later finance minister korn chatikavanij on fiscal policy. to close the circle, i will speak on monetary policy to complete your view on the investment opportunities and prospects of the thai economy. as international investors, i believe, you want to have a firm understanding of the country ’ s policy environment. this is what i will discuss today – the monetary policy options going forward in light of my assessment of the global economy and the thai economy. the assigned title of my talk today is “ thai monetary policy in the environment of excess global liquidity ”. let me stress that i have a different opinion on the issue of excess global liquidity than most. global liquidity is currently problematic in the sense that it is fluid, rather than excessive. let me discuss why. first, let me give you my assessment of the global economy. the global economy has entered a phase of fluid global liquidity amid uneven recovery and shifting risk appetite. this phase is characterized by weak recovery in the advanced economies which prompted loose monetary policy and extraordinary monetary measures such as qe2 in the us that have resulted in artificially low interest rates in the advanced economies. these record - low interest rates encouraged investors to seek out higher return in risky emerging market assets, particularly here in asia. in addition to the push factor of low interest rates and weak recovery in the us and euro area, strong economic fundamentals in asia, as reflected in growth and eventual currency gain, served as a pull factor. as a result, capital became more “ fluid ” – constantly in search of yield and therefore very sensitive to news and rumors. such search for risky yield resulted in capital inflows into eme assets last year, as you all know. these inflows contributed to the large appreciation of the thai baht last year, and indeed other emerging markets. here i want to emphasize that the inflows was due to a reallocation in global portfolio, or a