thailand has signifcantly benefited from the increasing coordination between supervisors and external auditors. despite these benefts, there are several challenges ahead in our relationship with external auditors that merits careful deliberation. first, supervisors should be sensitive to the independence of the external auditors, particularly when the auditors provide various types of consulting services to the bank, which often times may be far more lucrative than external auditing fees. in thailand, the ministry of commerce released a ministerial regulation in 1991 to prohibit external auditors from providing auditing services to any entities where their independence cannot be maintained. however, this regulation still leaves the assessment of independence to the external auditors themselves. if necessary, regulators may consider limiting the scope of non - auditing services or requiring the auditors to submit a request for approval prior to engaging in non - auditing activities in the same entity that they provide auditing service. one good example is the sarbanes oxeley act, which was issued in the u. s. in 2002 disallowing audit firms from providing specifc functions to their audit clients such as bookkeeping, financial information system design and appraisal service, etc. second, the work of the auditors should never replace supervisory responsibilities. audited financial statements are not prepared to serve supervisory purposes and external auditors are not trained as bank supervisors. accounting policies and definitions used by auditors may be different from those required by supervisors under thai regulatory standards, although in general they tend to be the same. for example, there are differences between supervisory guidelines and accounting requirements on asset classification and provisioning. whereas the supervisory guidelines prescribe minimum specific ratios of loan provisions depending on the quality of loans, the accounting standard is less specifc and only requires banks to set aside appropriate provisions. second, the method used by regulators to set aside provisions is based on an “ expected loss model ”, while the accounting standards require provisions based on an “ incurred loss model ”. these conceptual differences can lead to different outcomes on such critical issues as the volume of classified asset, the adequacy of provisions, and therefore, capital adequacy. it ’ s useful to be mindful of these differences and understand the context that leads to the need to maintain these differences. in closing, i want to reiterate that external auditors have truly been one of our key partners in the quest for greater financial stability. thailand ’ s financial industry is currently in the midst of structural

generally speaking, there has been a relatively strong increase in loans to financially vulnerable enterprises. thus, the share of loans to enterprises with low capital ratios and high interest burdens has increased over time. in addition, a lower value - at - risk for market risk in the last two years has helped boost capital ratios. thus, a sharp rise in financial market volatility could put pressure on banks. 3 overvaluing assets and loan collateral high valuations point to another weak spot in the financial system – the possibility that loan collateral values may be overestimated. let me illustrate my point by taking the german real estate market as an example. the real estate market is crucially important for the german economy as a whole : loans for house purchase account for more than half of lending to households and enterprises. our assessment of developments in the residential real estate market from a financial stability perspective is based on three indicators : housing prices are continuing to increase dynamically. 2 / 5 bis central bankers'speeches but lending is growing at a below - average pace by historical standards. and overall, credit standards have not changed remarkably – household debt, for instance, has remained almost static. overall, we currently see no need to activate any macroprudential instruments in order to contain risks to financial stability emanating from the residential real estate market. we are, however, continuing to closely monitor this market. because the strong appreciation in prices harbours the risk that the quality of loan collateral is possibly being overestimated. in the event of a correction, the value of collateral might decline unexpectedly sharply, pushing up losses from residential real estate loans as a result. one stress test exercise reveals that an economic slump and shrinking real estate prices would in some cases take a heavy toll on the real estate lending portfolios of german banks. 4 interest rate risk as a result of maturity transformation finally, the german banking system has become more vulnerable to an abrupt increase in risk premia and thus in interest rates. the share of newly granted loans with an fixed - term interest rates of over ten years has risen from 26 % at the beginning of 2010 to 45 % at last count. if interest rates were to quickly spike higher, this would instantly drive up the costs of funding these loans. but interest income would only increase with a time lag. this would affect savings banks and cooperative banks more than the larger credit institutions. and precisely because many institutions would be affected simultaneously, it would not be possible to cushion the impact by stepping