atchana waiquamdee : brief look at financial market indicators opening remarks by dr atchana waiquamdee, deputy governor for monetary stability, bank of thailand, at the workshop on financial market indicators, bangkok, 7 june 2007. * * * good morning, and allow me to welcome you to bangkok, and to this morning ’ s workshop on financial market indicators. the issue we are about to discuss today, namely the use financial indicators, itself is not a new topic. especially in more developed financial markets, the use of financial indicators has been integral to the well - functioning of markets. in those cases, utilizing financial market indicators in the policy - making process is nothing new. in many of the emerging markets of asia, however, this has not been the case. financial indicators in the emerging markets have been more difficult to come by, and even much more difficult to interpret – due largely to gaps in market development. yet, as the financial markets of asian economies began to gather both depth and breadth, more and more financial market indicators are becoming readily available for policy use. since the availability of the indicators in emerging markets is rather recent and the fundamental conditions in these markets are still very dissimilar to those of the more matured ones, the use of financial market indicators in emerging markets for policy purposes merits much thought and attention. so what exactly are we talking about when referring to financial market indicators? interpreted broadly, this can include relatively simple indicators, such as interest rates, interest rate spreads, and returns. they include other measures related to the value of financial or tangible assets like bonds, stocks, housing, and gold. and of course they also include more sophisticated, data - intensive estimates of risk, which we hope to discuss today. for central banks, one of the main questions that arises is whether financial market indicators are useful in setting monetary policy. and if so, which ones are most useful for central banks, and for what purpose? in general, financial market indicators are used by central banks to : ( 1 ) gauge market sentiment with regards to expected changes to policy variables ; ( 2 ) identify types and sources of shocks to the economy ; and ( 3 ) predict future developments in economic activity and inflation. such predictions of longer - term inflation are also useful in checking how markets view the credibility of the authorities ’ commitments to their final price target. so financial indicators can be used to double check econometric and judgmental predictions as well as flag a problem of

is important to recognize that, while these quantitative techniques are valuable tools, they are no substitute for a thorough understanding of the overall risk dynamic of financial institutions, the related systemic implications, as well as the behaviour of institutions and markets. the emphasis here is that a good macro - surveillance framework must balance technical excellence and technical complexity with sound rationale and good qualitative judgment in order to make real contribution to policy decision. the robust framework of risk - based supervision such as basel ii places a strong technical demand on supervisors not only on pillar i but also for the supervisory review work in pillar ii, which requires dynamically assessing on - going risk and changing risk profile of financial institutions. therefore, macrosurveillance, stress - testing, as well as model validation, will fast become the norm for good risk management. macro - surveillance and its parallel policy framework – especially macro - prudential policy – are now exciting fields for central banks and supervisory agencies. but in my view, the needed pioneered framework is yet to be developed. the quantitative models and tools so far are at its early stage of development compared to those more established in monetary policy, such as the inflation targeting framework. the frontier work currently undertaken by central banks of advanced economies are, for example, developing macro - stress testing model which incorporates interlinkages between financial and real sectors. such work is quite demanding due to the complexity of the evolving linkages and behaviour linked to rapid developments in economic and financial sector, and all the more so with globalisation. in response, community of experts are emerging, and many such experts are now using virtual network such as stress - testing internet platform to share knowledge and experience. for emerging economies such as most seacen members, it is even more challenging in light of data limitations and continued structural changes that are taking place in our markets, particularly the proliferation of new financial products that consumers are less familiar with, and are less able to manage risk because of market limitations in terms of the availability of hedging instruments. this type of situation, if not properly monitored and supervised, can lead to a build - up of financial vulnerability and risks, for example in consumer finance, real estate, and the housing market. therefore, supervisors need to work closely with their counterparts in the monetary policy wing to monitor and assess possible risks. the timeliness of this seminar is all the more important in light of the on - going developments in the global financial markets. global imbalance between economies continues to be an important