This led to the increase in international reserves from 52 billion US dollars at the end of 2005 to almost 67 billion US dollars by the end of last year. In addition, the forward obligation rose from 3.8 billion US dollars in 2005 to 6.9 billion US dollars in 2006. These FX interventions and exchange rate movements do have implications for our own balance sheet. First, the appreciation resulted in the unrealized loss from FX valuation of the international asset we hold when marked-to-market in baht. Simply put, the value of our international reserves in baht terms has fallen purely due to the falling US dollar and other major currencies vis-à-vis the baht. Second, FX interventions lead to increased domestic liquidity. As a result, monetary sterilization is required to remove the resultant liquidity and safeguard price stability. This is a necessary and justified cost to central banks for preserving price stability, and safeguarding the economy against excessive exchange rate movements. Such losses are an unavoidable consequence of central banking operations under a managed floating exchange rate regime. As regional currencies have sharply strengthened over the past year, most central banks in the region will also be facing a similar challenge. The key point here is that, our foreign assets, measured in foreign currency terms, have not fallen. More importantly, the goal of a central bank is to maintain monetary and financial stability.
Banks will need to further build on this significant progress in order to meet the challenges going forward. These include macroeconomic challenges, growing pressure from increasing competition, and the changing regulatory environment. Obviously, the ability to meet these challenges varies among banks. But we, as regulators, are well prepared to steer a steady course for the banking system as a whole. As you know, the first phase of the Financial Sector Master Plan has been completed. We have already seen significant consolidation and increased efficiency of the banking sector. We are moving onto the second phase of the Master Plan, which will further step up the pace of reform. This will increase the efficiency of the system and ensure that it can meet intensified competition that will come with globalization. BIS Review 20/2007  3  Let me emphasize that globalization is a pervasive process. Given financial innovations, it can transcend national borders even without an explicit market opening. Our liberalization strategy is to ensure strengthening of the domestic system, and allow gradual opening of the banking sector. This will mean new entries into the system, as well as more intensified competition between existing players. The phasing of this process will be consistent with continued economic and financial stability. The banking system must be prepared for greater competition. Improved risk management framework will be the critical success factor for banks' ability to meet future challenges. These include the adoption of IAS 39, currently underway, and the new Basel Capital Accord at the end of next year.