In Asia, economic and financial liberalization is a powerful driving force that is reshaping our financial landscape today. This could potentially open up the gap between risk and our ability to manage it. So what should be our strategy to build trust, but avoid being blinded by our sense of security? The strategy to deal with this is to have Trust that is counter balanced by well informed debate on risk management, supervision, and good governance. So, we need a good dose of well-informed skepticism, as well as financially literate public. Let me turn to the progress on the global efforts to reform regulation. Where are we today? In all of these reforms – be they Basel or FSB – the questions we ask are these. Have we done enough to rebuild “Trust” and secure financial soundness? Is the international standard right for the local context? Are there unintended consequences, i.e. the bad side-effects? Getting it right, with the right balance, and right timing is very difficult. This is especially so when the dust has not settled, and the real economy is still vulnerable. Indeed, five years after the crisis erupted in the US, we are still seeing the spread of impact in Europe, and deleveraging of European banks. From Thailand’s own bitter experience of the 1997 crisis, the combined impact of all the economic and financial sector reforms was hard to gauge beforehand.
And certainly, the design of reform package did not anticipate the effect of the contagion spreading to the rest of Asia and our trading partners. The key lesson is that, even in our best effort to get the reform right, we may still fumble. So, how should Asia think about the impact of the global regulatory reform? For Asia, although the banking system has been quite resilient to the crisis, these regulatory reforms carry high stake for us, especially for our future developments. BIS central bankers’ speeches  1  The reforms such as Basel III are, to a large extent, designed to correct major weaknesses in Basel II that allowed the crisis to emerge in western countries. These weaknesses were such as undercapitalization, over-leveraging, inadequate liquidity, and procyclicality of the banking system. So, in so far as Basel III would make these banks safer, it would contribute to stability of the global economy. However, the weaknesses that were targeted by Basel III did not cause damage in Asia. This is mainly because the banking model here tends to be simpler, understandable, and traceable. The western system, on the other hand, is so complex that no one, not even the CEO, could understands the bank’s structure and activities. The value of this simpler model is that bankers know what is going on in their banks. Supervisors can keep very close eyes on their activities.