monetary policy must reconsider rebalancing and carefully re - examine all the options, given how the balance of risks has significantly shifted toward growth and away from inflation. we are therefore faced with three key questions. first, how will the euro crisis play out? second, can thailand grow through the euro crisis? and third, what should monetary policy do? let me now turn to the first question. how will the euro crisis play out? in my view, the short answer is this. the euro zone will mostly likely remain intact and avoid a liquidity seizure similar to the one seen during the lehman crisis. however, the euro zone will face a slow and difficult recovery. let me qualify my view by saying that the reality is much more complicated. so let me go quickly over some salient details of the euro crisis and its current impact on asia. a great deal of uncertainty, much of it induced by lack of policy clarity, surrounds the euro crisis. this is reflected by how global fx markets have been in turmoil as investors fled euro and asian emerging markets assets for safe havens. the thai baht was not spared from this turbulence and experienced high volatility and bouts of weakening pressure. however, investors eventually returned to emerging markets in asia as yields in advanced economies moved lower and asian fundamentals improved amid slowing inflation pressure. in thailand, government bonds, in particular, have proven attractive. in fact, foreign participation in both bond and equity is now above pre - lehman levels. however for equity, the rate of return was bis central bankers ’ speeches slow of late ; net inflows were negative last year but are now slightly positive for the second half of this year. amid all this turbulence, all this back - and - forth, the baht fluctuated in tandem, first depreciating in the first quarter of the year up until july and then appreciating somewhat. this trend was punctuated by bouts of volatility each time euro policy faced implementation difficulties once push comes to shove and member nations have to make the difficult tradeoff between national interests and supra - national interests. but back to the question of how the euro crisis will play out. no doubt the drama of policy uncertainty will continue. but what will be the end - game? broadly speaking, we envision two scenarios : an extreme scenario and a baseline scenario. in the extreme scenario, prolonged political gridlock over policy leads to a liquidity seizure. failure to ratify the

to curb borrower indebtedness, then the aforementioned tools are also useful, as are other measures including increasing collateral requirements ( e. g. ltv ratios ), changing the tax treatment of mortgage interest and capital controls ( but risk of long - term distortions ). if the goal is to reduce banks ’ exposure to asset price cycles then counter cyclical capital buffers are useful as well as tools of a more micro - prudential nature. basel capital and liquidity standards in addition to the establishment the esrb, several steps have been taken both at the international and at the european level to improve the regulatory framework, by introducing financial regulations that directly or indirectly address systemic risks. these include the new basel capital and liquidity requirements published in december 2010. while the higher minimum capital requirements are aimed at strengthening micro - prudential supervision, they will be complemented by the introduction of counter cyclical capital buffers from 2016 onwards. the objective of countercyclical buffers is to ensure banks build up capital buffers in good times, so that capital is available to absorb increased losses in downturns. this tool is largely macro - prudential and should help mitigate excessive credit growth and avoid the build up of excessive risks – not just in mortgage markets – but in the financial system as a whole. although the trigger for activating the counter - cyclical capital buffer is defined as the excessive deviation of private sector credit growth from its long term trend, authorities may use complementary sources of information in buffer settings, including more granular data on house prices and mortgage loans. the new liquidity rules of basel iii should also mitigate excessive credit growth. in particular, the so called net stable funding ratio, which aims to reduce the maturity mismatch by requiring banks to finance their long term loans with long term funds. the basel iii framework, represents a minimum standard, and therefore, authorities can introduce more stringent prudential rules to address specific risks in their domestic banking systems, for example higher risk weights for certain exposure classes. for example, the proposed capital requirements regulation ( art. 119 ), which will be directly applicable across all european countries, offers a leeway for national authorities to increase risk weights or set stricter criteria ( e. g. for loan - to - value ratios ) for exposures secured on residential or commercial real estate on the grounds of financial stability. bis central bankers ’ speeches the role of central banks : leaning against the wind? the