The return on asset which stood at 1.3 percent during the first quarter of 2007 fell to 0.7 percent for the first half of the year, reflecting provision in accordance with IAS39, the new accounting standards as you know, to strengthen the capital base. Meanwhile, qualitative improvements have resulted from much tighter board of director oversight and accountability, as required by the Bank of Thailand. On the non-bank side, non-bank credit card companies have been competing more strongly for market shares. To prevent default risks and NPL, and to safeguard against the overall  BIS Review 107/2007  1  financial stability, we have strengthened efforts to communicate to and raise awareness with the general public on this issue. Regulatory measures were also put in place to ensure that consumers were protected and well-informed, including the prescription of rules, procedures, and conditions for credit card business, including interests and service fee charges as well as debt collection. Turning to macroeconomic stability, latest data for August showed headline inflation at 1.1 percent and core inflation at 0.7 percent. On the exchange rate, while the baht movement has reflected largely external developments, there have also been internal drivers, which include large surplus in current and capital accounts. During the first 7 months of this year, the balance of payments recorded a surplus of 5.9 billion US dollar in total. Overall, international reserves rose to over 74 billion US dollar at end-August, close to 3.6 times of short-term external debt.
Any risk management framework that is driven by the correlation structure of short-term moves alone would most likely be proven too rosy in the event of clusters of defaults. The issue is that the correlation structure locally may be very different than that in the tail of the distribution. Of course, there  2  When the Bank of England takes collateral, it is solely to guard against the risk of default and so all correlations in that state of the world are relevant to what collateral is taken and the haircuts applied. See Breeden and Whisker, 2010, “Collateral risk management at the Bank of England”, Quarterly Bulletin, Q2, pp 94–103. 2  BIS central bankers’ speeches  are many practical problems in analyzing what could happen statistically in the tails, since these scenarios are, by definition, rare and the pay-offs may be non-linear3. Taking this second example a little further, assume that most big banks follow similar strategies. Most banks will then end up with a more diversified credit portfolio than if each bank was only holding the loans it originated itself, but they may also end up with similar portfolios of risk. In such a scenario, the system can easily absorb small shocks, but because of the diversification, a really big shock may threaten to bring down all of them instead of just the ones that happened to have originated the most problematic loans.