bandid nijathaworn : the current financial crisis, lessons learned, and future implications keynote address by dr bandid nijathaworn, deputy governor of the bank of thailand, at the 11th seacen conference of directors of supervision of asia - pacific economies, bangkok, 29 july 2009. * * * distinguished speakers, participants, colleagues, ladies and gentlemen, it is my pleasure to be giving this morning ’ s keynote address for the opening of the eleventh seacen conference of directors of supervision of asia - pacific economies under the theme : “ the current financial crisis, lessons learned, and future implications. ” this forum gives us an excellent opportunity, at this crucial juncture, to discuss the recent global financial crisis and to share amongst ourselves the experience as well as the lessons learned, so that we can further strengthen and improve our financial systems and supervision. looking at the agenda, it is certain that the discussion in the next two days will be a most valuable one. so far, the seacen economies, one way or another, have all been affected by the current global financial turmoil. as central bankers and regulators, we are faced with the important task of putting in place future regulation, and the obvious place to start is to ask the questions whether the crisis could have been prevented or mitigated in the first place, and how the lessons learned from the current crisis can be used to prevent the next crisis. these are not easy questions to answer. we may be aided by our understanding of the common factors shared by past financial crises, and how lessons from the past have helped to shape the current policy. but always, there will be other or new challenges that will be difficult for us to anticipate or be aware of. with these in mind, let me share with you my thoughts on some of these issues. first, on the causes of financial crisis. according to a well - known study by reinhart and rogoff in 2008, financial crises in the past, dated back to the 1800s, shared many common causes. chief among these are macroeconomic imbalances and the roles played by large and persistent capital flows, asset price bubbles, and credit boom. although, compared with the asian financial crisis, the current crisis does differ in terms of the impact, the scale, and the role played by financial innovation, but the two crises, nonetheless, do share many of the common factors mentioned above. for example, in the case of asset price and credit boom, the

policy goals of banks, while corporate governance guidance and notifications under the fit - and - proper rule for the appointment of bank management have been put in place. financial institutions have been positive in embracing these changes, as they contribute to a more open, more accountable, and more transparent financial system. given the dynamic changes in the financial system, it is important for risk management and supervision to be forward - looking, and recognize margins of error from risk models. thus, it is sensible to adopt the conservative approach. here, let me also highlight the importance of “ stress - testing ” as a risk management and supervisory tool. during the past four years, we have conducted stress - testing, both top - down and bottom - up by requiring local banks to do the same, for risk management and capital planning purposes. currently, stress - testing has become an integral part of our supervisory process. from the experience so far, we find stress - testing to be an extremely useful process and dialogue for identifying potential weaknesses of banks in a forward - looking manner, as well as in alerting bank management to take the necessary corrective actions. as a result of the macro - prudential framework implemented and the emphasis of supervision that has been placed on improving risk management of banks, thai financial institutions, so far, have remained resilient to impact of the global financial turmoil. i believe this is a common experience here in seacen. ladies and gentlemen. looking ahead, once the global economic and financial system recovers, many important issues will require answers on how to move forward from the point of view of regulatory guidance. on this, the key issues that will be most relevant to our region in my view will include : first, large capital inflows and their implications for risk management capacity of the financial system ; second, the issue of procyclicality and how to deal with it effectively in the context of bank regulation and supervision, and third, managing the cross - border spillover effects that potentially can be a source of systemic risk. first, on the issue of capital flows. at this time, given better growth prospects for emerging markets in the near - term, there could be a resurgence of strong capital flows to emerging markets once the current global crisis subsides. as large capital inflows are known to be one of the key contributing factors of many financial crises in the past, preparing the economic and financial system to effectively intermediate it and manage the associated risk to maintain financial stability, will