We have encouraged banks to become more transparent in providing the public with more timely and transparent information on bank management, especially information relating to non-performing loans, lending to related parties, and violation of the Bank of Thailand’s regulations as well as the fines incurred. In addition, we have encouraged banks to give greater importance to and abide by the best principles of corporate governance by limiting the number of outside directorships which the bank directors or bank senior executives may hold to not more than three, as well as not being an authorised director. Before the announcement made on this issue by the Bank of Thailand on 17 September 1999, there were a total of 82 bank directors holding more than 3 outside directorships. The number has now reduced to 22, and should be finally phased out. To reduce the risk of economic bubbles and the consequence to financial institutions, the Bank of Thailand plans to reduce the reliance of the private sector on bank credits, from a share of 77 % of the total sources of funds, presently, to 55 % in the next 10 years. This requires that Thailand must have strong markets for debt instruments and equities. Thus, the development of the bond market is among the major tasks the Bank of Thailand has undertaken during the year, as it will provide the infrastructure for the conduct of monetary policy through open market operation, as well as enhancing the country’s long-term economic development.
However, my view is that, in certain situations, it can be appropriate to attempt to counteract financial imbalances with a limited tightening of monetary policy. A tightening of monetary policy would be likely to have a restraining effect on credit growth and asset prices. Even if monetary policy does not succeed in entirely preventing financial imbalances from arising, it can limit their extent. The expected macroeconomic consequences following the correction of imbalances should then be less serious, particularly if the risk of a serious financial crisis is reduced. The clear communication of the reasons for increased interest rates should raise public awareness of the risks of financial imbalances, which, in my opinion, may have a stabilising effect. In this example, monetary policy contributes to more stable inflation and resource utilisation over the slightly longer term, which should be balanced against the short-term costs of conducting a somewhat tighter monetary policy. This form of monetary policy thus does not entail a deviation from flexible inflation targeting, that is to say a monetary policy aimed at stabilising both inflation and the real development. Neither is it an issue of turning house prices or any other asset price into a target variable for monetary policy. On the contrary, it is an illustration of flexible inflation targeting in which the destabilising effect of financial imbalances on inflation and resource utilisation are incorporated into the monetary policy assessment.