This can lead to haircut spirals in which higher haircuts lead to forced asset sales, increased volatility and still higher haircuts. These sources of instability create the risk of a cascade – of firms moving rapidly from the situation represented in Figure 1 to that shown in Figure 2. Once the firm’s viability is in question and it is does not have access to an insured deposit funding base, the next stop is often a full-scale liquidity crisis that often cannot be stopped without massive government intervention. Fortunately, there are ways to mitigate the risk of a cascade. First, we can require that financial intermediaries hold more capital. This would push the probability distribution to the right in Figure 2. With sufficient additional capital, the probability of insolvency could be reduced to a low enough level that liquidity providers would not run. Higher capital requirements work to reduce the risk of liquidity runs, but potentially at the cost of making the process of financial intermediation much more expensive. In particular, a requirement that firms must hold more capital increases intermediation costs. Moreover, banks may respond to higher capital requirements by taking on greater risk. If an increase in risk-taking were to occur, the movement of the probability distribution to the right in Figure 2 might be offset by an increase in the degree of dispersion. Thus, higher capital requirements might not necessarily be sufficient to push all of the probability distribution above zero. Second, regulators could require greater liquidity buffers.
B.  Thailand’s outlook and BOT’s monetary and financial policies  Ladies and Gentlemen, Like the rest of emerging Asia, the Thai economy appears to soften in the near- term. On top of export recovery that could be more delayed, the vital contribution from domestic spending is also viewed to lessen. Part of this, of course, reflects a natural reversion to a more normal pace of growth following unusually strong growth last year. More specifically, the boost from the first-car scheme dissipated sooner than expected. Household debt, which has risen fast and is now in the ballpark of 80 percent of GDP, starts to weigh on durable and semi-durable purchases visibly. And businesses also seem to postpone investment awaiting better economic conditions at home and abroad. In light of these factors, the Bank of Thailand projected GDP growth to be around 4 percent this year, a downward revision from a more bullish view we had earlier. But I would like to note that this is still a reasonable growth amid weak external environments, coupled with the fact that consumption has become somewhat overstimulated already. Looking ahead, fundamentals of the economy remain sound overall. Monetary and fiscal conditions will continue to be supportive. And despite some delay, contribution from exports is also bound to improve as the global economy gains a firmer footing.