m r pridiyathorn devakula : risk management - challenge for the thai financial institutions and regulator opening remark by mr m r pridiyathorn devakula, governor of the bank of thailand, at the market risk management techniques for the bis capital regime seminar, held in bangkok, 12 october 2001. * * * distinguished guests, ladies and gentlemen, i would like to personally extend a warm welcome and to express our deep appreciation to all of our distinguished speakers and panelists who have agreed to come to bangkok at this difficult time. i would also like to thank our co - host, the world bank, in the efforts and interest which they have shown to make this important seminar possible. it is also important to convey my appreciation to the members of the financial industry for your interest and enthusiastic participation in this seminar. as we all know, the new accord proposal is scheduled to be finalized early next year, with its implementation scheduled for 2005. countries that have not yet implemented the consolidated supervision will have until 2008 to comply with the new accord. thailand is in this second category since we have yet to be empowered by law to carry out consolidated supervision. the new banking act with such a provision is expected to take effect next year. even with such a relatively long grace period toward compliance, thai financial institutions have already taken the first step of the journey toward that direction. we have recently conducted a survey of the financial institutions to check their readiness to conform to the credit risk guidelines under the new accord. i have been reported that many plan to be ready for the standardized approach, while others are working towards the irb approach, this is a welcome news. more importantly, financial institutions have all started the effort to strengthen risk management in their respective institutions with some notable progress so far, and we look forward to more progress to come. i would like to take this opportunity to commend all of you for such efforts. after all, the bis capital requirement only serves as a cushion of losses or failure of an institution whereas it is the risk management that reduces the chance of failure. the significant progress you have made in the area of risk management deserves our full support and commendation, particularly so as this is a very difficult time for the financial industries. ladies and gentlemen, coming back to the issue of preparation for the new accord, one can see that significant challenges remain ahead. i will now turn to these challenges. first, the technical and infrastructure aspects. it is important to build up a deep understanding of

the technicality of approaches and methodology underlying the new accord. moreover, it is critical to achieve in - depth knowledge of risk management and the impact of such developments on business model of the financial institution. therefore the task ahead is very challenging, far beyond just acquiring software that would crank out numbers. on the infrastructure aspect, data is a critical issue. the data that could be collected at this time would be biased since the economic conditions are not normal. nevertheless, we still need to start building up the database. in many countries, such a challenge is tackled with the cooperation between the financial institutions and the regulators. for example, in a number of countries, developed countries in fact, regulators plays crucial coordination role in supporting the built - up of the database system, in educating and knowledge transfer. the bank of thailand will be more than happy to play this role. turning now to the second major challenge for the financial institutions, the intensified domestic and foreign competition brought about by liberalization, globalization and technology. banks also experience competition from non - bank financial institutions, with the traditional financial firms and their business line becoming blurred by conventional wisdom. we also see such strategy as m & a across similar financial firms, or between financial firms and non - financial firms such as it providers. in the meantime, outsourcing and franchising of technology, most notably through the venders for risk management software or solution have also exploded as a phenomenon. while the picture is still evolving so fast and future landscape hard to forecast, financial institutions find themselves stepping more and more into a less familiar territory, and tremendous efforts must be put in to survive the intense competition and dynamism. at the same time, attention must be diverted to deal with preparation for the new accord. the third major challenge is that financial institutions need to further strengthen their financial standing in the recovery path after the crisis. preparing for the new accord means cost impact from building capacity in terms of people, know - how, it, data, and business model re - engineering. therefore, strong leadership is crucial to propel the financial institution through the short - term difficulties, while at the same time steering the institution with long - term vision and strategy to ensure that the financial institution survives the challenge and complies with international best practices. as for the regulators, our task at the bank of thailand is no less challenging. in addition to the need to build up our own in - depth understanding and capacity to implement the new accord, we are also