market for financial engineering thrives - derivatives are used to engineer and structure complex products tailor - made for various market players with different risk - return preferences. while this process brings benefit, it also brings inherent risks that need to be properly managed, as the current turmoil clearly demonstrates. on the benefit side, the market would become more efficient if buyers and sellers of financial products are offered product choices that better fit their risk - return preferences. nonetheless, there are important risks, and the subprime and cdo problem have brought this to light. in short, the current global turmoil is a sharp reminder of the danger of overestimating one ’ s own risk management ability. on the one hand, iconic investment banks, giant insurance firms, and market specialists such as rating agencies and bond insurers have, with hindsight, overestimated their ability to price and manage complex derivatives. on the other hand, regulatory frameworks also need to be strengthened to ensure that financial institutions have adequate capital and liquidity. hence, there are calls for strengthening regulations, and i agree that there are many areas such as leveraging and capital requirements that needs to be strengthened. but, i also believe we would do well to approach this in a steady and thorough manner, as regulatory changes need to be considered carefully. particularly, there needs to be domestic and international harmonization to avoid the sort of harmful arbitrage that has been associated with the current turmoil. moreover, the current crisis also highlights the truly globalised nature of the financial market, as uncoordinated regulatory measures could cause major difficulty in crisis management. in short, we must ensure that regulations are truly risk - based and nondistortive, on both a domestic and international basis. this requires significant supervisory coordination going forward. this, however, does not mean that we should be complacent. in the case of the bank of thailand, we have asked banks to carry - out stress - tests to ensure that bank ’ s board and management are fully alert to the increased risk, have the strategy to manage it, and have adequate capital and liquidity even in severe risk scenarios. the result of the stress - tests shows that the system remains resilient, but we will continue to monitor developments closely, and stand ready to take necessary actions to ensure financial stability. why have both financial institutions and regulators in mature economies and elsewhere not been fully prepared for such a challenge? first, there were many factors that caused the deterioration in the credit

cabinets and periodic elections both at the centre and several states. it is remarkable that political cycles have not hindered the progress of well - calibrated economic reforms. as michael mandelbaum, a democracy expert at johns hopkins university in washington said : “ there ’ s a lot of turmoil on the surface of indian democracy, but there ’ s a lot of consensus deep down in the political system. ” in fact the political system should lend comfort to the global businesses in view of elements of longterm predictability. ambassador yasukuki enoki, japanese ambassador to india is reported to have said : “ for the next two decades, indian society is predictable and democratic framework is predictable. ” as regards macro - economy, there is an increasing consensus that india has crossed the threshold of reform, leading the economy to become really market - oriented and price based economy. this orientation has helped the country emerging as the major service - outsourcing hub for the world. moreover, acceleration in growth is expected to be sustained in view of the evolving pattern of domestic demand. for example, national council of applied economic research ( ncaer ) mish data “ clearly indicates that india is growing immensely wealthy. by the end of this decade, the structure of the country ’ s demographics will change from an inverted pyramid, signifying a small rich class and a very large low - income class, to a rudimentary diamond, where a significant part of the low - income class moves up to become part of the middle class. ” further, there may be demographic bonus between 2010 and 2040 when india ’ s working population is still increasing while population in the rest of asia may be levelling off or even declining. moreover, public and private sector compete and co - exist in a dynamic balance which is imparting competitive strength to the economy. finally, in terms of business environment, the impressive growth coupled with market orientation of the economy has been a bottoms - up exercise, with a very broad - based growing entrepreneurial class. the capacity to innovate is considered high and costs of innovation are reportedly low in india. for example, engineering - intensive service - led manufacturing is sought to balance the advantages of standardised way of mass production of goods. reportedly, there is an increasing emphasis on service approach to manufacturing with adaptation of techniques such as lean production to keep quality high and boost efficiency. these tendencies are perhaps reflective of a penchant for innovation 5 / 7 among growing entrepreneurial class in india