To ensure that the banks’ capital really can cover losses, they must already today make certain adjustments in their equity on the basis of what actually exists on the asset side. The principles governing how to do this will now be tightened up. For example, deductions will have to be made directly from the Core Tier 1 capital, unlike today when either the total Tier 1 capital or the total capital base is adjusted. Nor will the banks be able to include assets that form the capital base in other financial institutions. The idea behind such a limitation is to counteract the domino effects that can arise if a bank goes bankrupt. Other important assets on the balance sheet that will require adjustment of the capital are goodwill and deferred tax assets. Another important change is that it will not be possible to include hybrid capital to the same extent as before. Innovative hybrid instruments with a so-called step up will, for example, be completely excluded from Tier 1 capital. The reason for this is that this relates to out-and-out rule arbitrage. Under the current regulations, it is not permitted to include dated debt instruments in the capital base. To get round this, the banks have issued securities with a socalled step up, where the interest rate rises if the security is not repurchased before a certain predetermined date.
The Bank of Thailand continues to place great emphasis on strengthening the regulatory framework and our surveillance capability in order to carry out prompt actions to adequately assess and deal with emerging risks in the financial system. We also have regular dialogues with top management of banks to discuss financial and business conditions, risk management, and issues relating to broader economic and financial stability. In terms of international standards, Thailand is on track to adopting the Basel II framework starting end of this year. For the move to Basel II, banks are aligning their risk management practices to prepare for the increase in requirements. In addition, the new Financial Institutions Businesses Act, which came into effect this past August, has also empowered the Bank of Thailand to fully enforce consolidated supervision, carry out prompt corrective action, and strengthen the governance of boards and top management. Ladies and gentlemen, Let me now turn to my second topic today, that is the medium-term plan to strengthen the efficiency and financial infrastructure for the banking system under the Financial Sector Master Plan Phase II. During the past five years, and under Phase I of the Financial Sector Master Plan, considerable progress has been made in strengthening the banking system, through consolidation of financial institutions, under the “One Presence” policy. There has been voluntary merger and acquisitions, among local institutions as well as with foreign partnerships, leading to fewer but stronger players, enhanced capital base, improved risk  4  BIS Review 133/2008  management and operational efficiency.