the countries develop economically and institutionally, a more flexible exchange rate and proper inflation target may well represent a less costly regime choice. to conclude, it is difficult nowadays to isolate oneself totally from external shocks and sudden capital movements. but the authorities in emerging markets can render their economies less vulnerable by running sustainable fiscal policies and choosing a suitable exchange rate regime. to build a sounder banking sector might be more challenging. again it is very difficult to isolate the banking sector from capital movements, but the authorities can demand large capital requirements. authorities could also supervise the currency mismatches in the banking sector properly. more capital and less foreign currency liabilities might render the economies less vulnerable to sudden capital movements and crises.

##cyclicality in the financial system, and that provides momentum for reform to strengthen financial infrastructure and governance. thailand, like most emerging markets, has also been struggling with this issue. and i want share with you some of the policies that we have pursued in response to the challenge. it is a long journey, and it is the journey that we are making. on the issue of reducing risk from procyclicality of the financial sector, prevent excessive lending, and ensure adequate capital. in our view, the key issue here is to reduce a possible large swing in the availability and the price of credit stemming from the tendency of banks to underestimate risks in good times, and then to overestimate them in bad times. on this, our approach has been to ensure that banks ’ capital and riskmanagement policy is forward - looking by using a combination of three instruments. the first is stress testing to ensure that bank ’ s own internal process for assessing the adequacy of capital and overall risk management is alert to possible key risks. thai banks have begun conducting stress tests as part of the supervisory process since early last year when we first underwent the fsap assessment. from our experience, we find stress testing to be a useful and effective instrument for helping banks in formulating strategy for capital and risk management in a forward - looking manner. also importantly, it provides a formal process for a two - way dialogue between banks and supervisors on risk management and on other financial stability issues. the second instrument is the fair value accounting rules or ias 39, which we have adopted for non - performing loans and for structured products. in our view, these rules can help strengthen market discipline over bank lending and investment. and because fair valuation involves marking to market, its adoption also helps make provisioning for asset impairment more forward - looking. the third instrument is prudential policy to limit excessive procyclicality. in the past five years, when capital inflows were strong, we have put in place prudential measures to stem the build - up of excessive credit growth on consumer spending and on speculative housing demand. these include measures on credit card approval and maximum loan - to - value ratio for luxury housing. as i noted earlier, in the context of monetary policy framework, combining inflation targeting with macroprudential measure offers a pragmatic approach to deal with concerns on financial stability and asset prices without compromising the discipline of monetary policy with respect to its primary inflation