##s, along with greater pressures on the exchange rate and higher chances of imbalance buildups in the future. for the real economy, it may delay some of the necessary adjustments. finally, fx intervention is not costless. we have to fund the intervention with local interest rates that are higher than what we would earn from our international reserves. bis central bankers ’ speeches experiences have also shown that, even after a large appreciation of the currency, capital inflows could still seep in and fuel speculative activities in markets such as real estate and equity. to help deal with specific pockets of the economy showing signs of potential bubbles, macro - prudential measures could be used. a recent example is the risk - weights adjustment related to the loan - to - value ( ltv ) ratio of loans made to property purchases. while macro - prudential measures aim to help lessen the effects of capital that has already flowed into the economy, capital account regulations can be used to deal directly with the size and type of incoming and outgoing flows. with an aim of creating more balanced capital flows, the bank of thailand has continued to liberalize our capital outflows, while on the inflow side we at times resort to tighter regulations when the situation deems necessary. implementing a capital account regulation, or less of it, requires a delicate balancing act. for outflow liberalization, on the one hand allowing more thai resident outflows is beneficial as it helps lessen upward pressure on the currency as well as improve the investment profile of the thai private sector toward a more diversified and possibly more efficient one. on the other hand, if risk assessment capacity of local investors remains low, too rapid outflow liberalization could make the country ’ s balance sheet more vulnerable rather than more robust. a balancing act is even more difficult when applying re - regulation on capital inflows. a measure that is too mild would lack effectiveness, while too drastic a measure would be too costly. for one thing, its distortionary effects would be large ; for another, increased policy uncertainty could turn away productive investors and raise the country ’ s risk premium. aware of these undesirable side effects of controls, we would limit their use to only when absolutely necessary and only on a temporary basis. on the use of interest rate policy, some may view the policy interest rate as another tool to deal with capital flows, and there have been public debates whether the recent hikes in the policy interest rate by the bank 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