thailand has a considerable policy room, especially fiscal policy, which helps to cushion the impact, by employing macroeconomic and prudential measures to support growth and maintain financial stability. nevertheless, we cannot afford to be complacent given the severity of the global turmoil. the bank of thailand has asked banks to conduct stress - testing to ensure banks are alert to potential impact of downside risks. recent stress - testing, which covers credit market, and liquidity risks, linked to a macroeconomic impact scenario, confirms the resiliency of the thai banking sector. on the regulatory front, considerable progress has been made to increase the efficiency, adhere to international best practices, strengthen banks, capital position and enhance risk management practices. the bank of thailand continues to place great emphasis on strengthening the regulatory framework and our surveillance capability in order to carry out prompt actions to adequately assess and deal with emerging risks in the financial system. we also have regular dialogues with top management of banks to discuss financial and business conditions, risk management, and issues relating to broader economic and financial stability. in terms of international standards, thailand is on track to adopting the basel ii framework starting end of this year. for the move to basel ii, banks are aligning their risk management practices to prepare for the increase in requirements. in addition, the new financial institutions businesses act, which came into effect this past august, has also empowered the bank of thailand to fully enforce consolidated supervision, carry out prompt corrective action, and strengthen the governance of boards and top management. ladies and gentlemen, let me now turn to my second topic today, that is the medium - term plan to strengthen the efficiency and financial infrastructure for the banking system under the financial sector master plan phase ii. during the past five years, and under phase i of the financial sector master plan, considerable progress has been made in strengthening the banking system, through consolidation of financial institutions, under the “ one presence ” policy. there has been voluntary merger and acquisitions, among local institutions as well as with foreign partnerships, leading to fewer but stronger players, enhanced capital base, improved risk management and operational efficiency. the enhanced strength and increased competition has fostered continued profitability as well as expansion of economies of scale and scope in the banking system, with wider range of products to serve the public. going forward, phase ii of the financial sector master plan seeks to build further on this process, and ensure that the thai banking system can meet future challenges. these challenges include globalisation and technological

is the stability aspect. the financial sector, while playing an important role in supporting the real economy, can at the same time be the source of risk and instability to the real sector. as we know, the spillover effects from financial to real sector can take many forms. for example, the tendency for financial institutions to extend more credit during economic upswings, and scale back lending precisely during downturns, can contribute to the amplitude of the business cycles. this “ procyclicality ” mechanism works to exacerbate real shocks, raise the degree of economic fluctuations, and in extreme cases can play a part in leading to financial or economic crises. one remedy to this problem is to utilize the supervisory and regulatory function in pursuit of macroeconomic and system - wide stability objectives, particularly by reducing the degree of procyclicality. such “ macroprudential ” approach to regulation is rapidly becoming a received wisdom among academics and practitioners, and indeed is the guiding principle underlying the recently finalized basel iii proposal. while it is encouraging that practical implementation has already been set in motion, there remains a degree of opaqueness at the conceptual level about the desirable features that should govern the design of macroprudential policy. this point leads me to my second topic that i want to focus my talk on today, that is macroprudential policy and long - term financial stability. in my view, there are three important issues regarding macroprudential regulation. the first is the objective of macroprudential policy, which conceptually is to safeguard financial stability. but, for practical purposes, the notion of financial stability is much more obscure compared to price stability, and the question of how macroprudential policy should be designed to target something that is loose in concept and difficult to measure in practice remains a challenge. to address this, one approach has been to distinguish between the two facets of financial stability : the systemic importance of a given financial institution on the one hand, and the procyclicality of the overall financial system on the other. such taxonomy implies that macroprudential policy should aim to improve the resilience of the financial infrastructure in these two aspects. with respect to systemic importance, various measurement tools have been developed, ranging from the network externality approach to the concept of conditional value - at - risk or covar associated with the works of adrian and brunnermeier. the latter method has since been applied to the cases of hong kong