pre - emptively if the bank waited until a consensus was reached on future economic developments and desirable policy actions. it is no exaggeration to say that the key to monetary policy management is in finding how these two requirements can be fulfilled simultaneously. central banks have tried to meet the two requirements through various techniques. for example, many central banks in the past adopted “ money supply targeting ”, in which monetary policy is aimed at achieving an intermediate target of money supply growth. this is a method based on the causality that fluctuations in money supply influence real economic activity with some time lag. however, it has been pointed out that financial innovations have made it difficult to discern the relationship between money supply and economic activity, and that although the relationship between the two is stable in the long term, it may be unsteady in the short term. accordingly, many of the central banks which set a money supply target today mainly use it as a general guideline for monetary policy or refer to it as one of the major indicators in making policy decisions, rather than attempting to adhere rigidly to it. some central banks now adopt “ inflation targeting ”, in which a certain target range is set for the inflation rate. this method aims to secure the confidence of the market by declaring beforehand the central bank ’ s commitment to a specific target. for those central banks employing inflation targeting, another challenge besides setting the target range is devising how to take appropriate, individual policy actions under the price target. countries with high inflation rates have succeeded in containing these rates by employing inflation targeting. however, the fact that the method has been effective in curbing a high inflation rate does not necessarily indicate that it will also be effective in sustaining already stable prices. recently, some academics in the united states have suggested evaluating the potential risks of price and economic fluctuations based on such concepts as the output gap and - 10 - the expected inflation rate, and then utilizing these evaluations as guidelines in managing monetary policy. unfortunately, it is difficult to establish rules or other convenient guidelines which are by themselves sufficient to ensure an optimal policy response. it is for this reason that the bank of japan has never adopted stringent targeting or specific rules to date, but instead has consistently emphasized the judgement of the overall economic conditions and has made efforts to improve underlying research and analytical skills. learning from the bitter experiences of the emergence and the bursting of the “ bubble ” economy, the bank attaches utmost importance to realizing price stability and thereby economic stability in

bandid nijathaworn : risk management and pillar ii implementation opening address by dr bandid nijathaworn, deputy governor of the bank of thailand, at the fsi - seanza regional seminar on the implementation of the supervisory review process ( pillar ii ) of basel ii, bangkok, 21 - 24 april 2009. * * * distinguished speakers ; and colleagues from seanza central banks and regulatory authorities, let me begin by extending a warm welcome to all of you to bangkok, and on behalf of seanza members, i would like to express our appreciation to all the speakers, as well as the fsi, for their contributions to make this fsi - seanza regional seminar on the implementation of the supervisory review process possible. this is all the more so as this seminar had to be rescheduled from last year, and in this regard, let me express our commitment that the bank of thailand stands ready to facilitate you and ensure that your experience here will be a fruitful and enjoyable one. ladies and gentlemen, the current global financial crisis underscores the need to strengthen risk management and risk - based supervision, so that we can deal more effectively with the increased complexity arising from both financial product innovation and increased interconnectedness between financial institutions. as for the current crisis, while many causes have been identified, what has become very clear is that financial institutions, capitals were not adequate given their risks, and this had allowed over - leveraging by financial institutions as well as by their customers, leading to over - indebtedness and asset price bubbles. the issue, therefore, underscores the inadequate risk management, covering the entire process : from the lack of proper risk measurement, especially with regard to complex product, as well as liquidity risk, to inadequate risk management and control, and to micro - prudential risk - based supervision. in addition, there is now greater attention being paid to the importance of macroprudential approach, in recognition of the risk from procyclicality and interconnectedness of institutions, especially the large and highly complex financial institutions. also, greater recognition is given to the problem of the unregulated shadow banking sector, like the hedge funds, which are also key in systemic risk process. all these issues pose a major policy challenge, as indeed the various working groups and committees of the bis are now working on the guidelines, and on the key issues such as accounting, valuations, procyclicality, and