m r pridiyathorn devakula : efficiency enhancements and risk management remarks by mr m r pridiyathorn devakula, governor of the bank of thailand, at the asian bankers ’ seminar, bangkok, 16 march 2006. * * * distinguished guests, fellow bankers, ladies and gentlemen, today ’ s seminar covers wide - ranging topics of interests to the banking community ranging from efficiency enhancements to risk management needed to achieve sustainable business growth. while these issues are topical and useful to bankers, i believe that one cannot simply reduce risks by relying on risk management process alone. an effective risk management system has to be supported by proper governance of the bank ’ s management and its board of directors. one of the painful lessons of the 1997 crisis was that improper governance practices at the board level were amongst the root causes of the downfall of too many financial institutions. back then, it was not unusual for banks to lend to related parties with close connections to their owners, directors, and management without the proper credit analysis. board members of banks often neglected their responsibilities to blow the whistle against these imprudent activities. many board members also did not have adequate and timely access to the necessary information to detect such misdeeds so that appropriate actions could be taken to prevent the resultant damages. the concept of “ governance ” as understood in western society and now introduced into our business organizations, including financial institutions, has served as a good starting point to rectify some of the root causes of the crisis. the western governance concept including the appointment of an independent director in the board of directors, the introduction of an audit committee, and other new initiatives to improve the governance structure, have helped to address some of the problems of the past — but only to a limited extent. unfortunately, there have been some actual practices in the western corporate world which are contrary to the intended ideals of good governance. the notorious examples of enron and worldcom are all too well - known, notwithstanding the fact that both corporations had boards of directors established in accordance with the western concept of good governance. yet both eventually faced severe financial difficulties. as i see it, there are two critical aspects of the western practices which may potentially lead to serious financial difficulties for the firm. the first is that the chairman and the ceo is one and the same person. the second is the practice of allowing company stock options to be part of the compensation for company directors. allow me to elaborate. a ceo is by designation the chief of management, responsible

2022 ). even in that case, real interest rates would be a given for central banks in small open economies. however, the dominant view in academic research is that changes in real interest rates are driven by global saving and investment patterns. 6 light at the end of the tunnel – time to start thinking about next time? to be able to handle the fact that general real interest rates are low for long periods, and it must also be able to handle the fact that the riksbank needs to raise the policy rate – sometimes relatively quickly and by a lot – so that inflation can be kept stable at 2 per cent. economic resilience requires an interaction between monetary policy and other policies, not least because it is through measures in other policy areas that we build this resilience. figure 2. policy rates and inflation excluding energy in a number of economies per cent and annual percentage change note. the red bar shows the highest and lowest outcomes for the policy rate in the euro area, the united states, the united kingdom, norway, canada and new zealand. the light blue area shows the highest and lowest outcomes for inflation excluding energy for the same sample of countries. sources : eurostat, statistics sweden, statistics canada, statistics norway, statistics new zealand, u. s. bureau of economic analysis, u. k. office for national statistics, the respective central bank and the riksbank. in some areas it has worked very well. for example, wage agreements have long been in line with the inflation target. this has also been the case in recent years, despite inflation being significantly higher than 2 per cent. as this has reduced the risk of a wage - price spiral, it has contributed to the riksbank being able to content itself with policy rate increases at a relatively low level in international terms, despite the fact that the rise in inflation in sweden was relatively rapid and the peak in inflation relatively high ( figure 2 ). this stability in wage formation has of course been positive and favourable for the economy as a whole. another important interaction is that between fiscal and monetary policies. during the recent upturn in inflation, this interaction has worked well, in the sense that fiscal policy has not reinforced inflationary impulses. in that case, the riksbank would probably have had to raise interest rates more than it did. the future interaction between fiscal policy and monetary policy more generally is currently the subject of fairly lively debate, including in the long - term survey 7 light at the end of