The most notable example here is perhaps in the UK where the government will abolish the Financial Services Authority (FSA) and transfer its regulatory responsibility back to the Bank of England. While the UK may be an extreme case, a growing consensus has emerged that central banks should play a key role in preserving the overall stability and smooth functioning of the financial system. In this respect, having supervisory authority over systemically important financial institutions, such as commercial banks, would make the central bank’s job a little easier. Clearly, having monetary policy, lender of last resort function, and macroprudential policy under the same roof allows for better policy coordination. Ladies and Gentlemen, Against the backdrop of the changing policy philosophy in the global central banking community, let me now turn to the second part of my talk which is what the Bank of Thailand has been doing in the past few years with regard to the maintenance of financial stability. Through the 1997 Asian financial crisis, we learnt firsthand the importance of financial stability to the real economy as well as the need to preserve it. Indeed, that the Thai economy recovered rapidly from the global financial crisis this time can be attributed in part to policies that put a strong emphasis on the health of the financial system.
This means that, we will be able to take care of systemically important financial firms outside current regulatory purview if the situation warrants. Ladies and Gentleman, Lastly, let me share with you what I see as major challenges for the maintenance of financial stability in Thailand. While we may have a head start over many countries, we are not in anyway complacent. In particular, three important challenges loom on the horizon. First, the global economy, while doing much better than a year ago, still have many vulnerabilities which could give rise to the next round of global financial instability. Most importantly, the public debt problems in certain European countries constitute a major risk factor. At the other end of the spectrum, the growth and interest rate disparity between Asia and advanced economies amidst the still abundant global liquidity from the unprecedented monetary policy stimulus around the world could attract de-stabilizing capital inflows that will put pressure on exchange rate, encourage a buildup of financial institutions’ short-term debt, and fuel bubbles in various sectors. Second, in light of the possible buildups of financial imbalances, there is a need to further enhance the ability to identify potential threats early on. For example, at least in its early phase, bubbles are almost always associated with favourable economic fundamentals. Effective monitoring of bubbles therefore calls for better data collection, market intelligence, and risk analysis. While timely bubble identification remains very difficult, the good news is that better identification techniques are being developed and will continue to improve.