The first implication, that the central bank has a strong stake in preventing financial instability, has several elements. The central bank needs to be willing to respond to limit financial market bubbles from developing in the first place. This includes not just paying attention to asset price bubbles, but also to related excesses in leverage and in short-term funding markets. As I noted in a speech a few years ago, this is difficult to do in practice.3 After all, bubbles are difficult to identify in real time and the central bank’s policy toolkit to deal with bubbles may be limited. However, this difficulty cannot be an excuse for inaction. Using the bully pulpit, implementing macroprudential measures, or adjusting monetary policy can generate superior results compared to inaction. The central bank also has to ensure that the financial system is sufficiently robust and resilient so that if there are financial market shocks, the banking system can absorb any shocks and continue to perform its credit intermediation function. This has many elements including tough capital and liquidity requirements for banks and strong financial market infrastructures. It also includes taking action to eliminate sources of vulnerabilities whenever they may arise – for example, strengthening the triparty repo system, reducing the vulnerability of money market mutual funds to runs, or forcing derivatives contracts to be standardized and centrally cleared. These actions should be undertaken during “peacetime” rather than when a crisis is already underway.
In closing, I want to reiterate that external auditors have truly been one of our key partners in the quest for greater financial stability. Thailand’s financial industry is currently in the midst of structural changes with the implementation of our Financial Sector Master Plan. One of the goals of the master plan is to promote greater competition, which in turn, may result in the evolution of bigger and more complex financial institutions. Against this background, our supervisors will need to fully embrace a risk-based supervisory philosophy and its focus on the quality of internal controls and risk management systems. Therefore, our relationship with external auditors will become even more important in the years ahead as we seek to strengthen banks’ risk management systems and enhance fnancial stability. Thank you. 2  BIS Review 55/2004