Therefore, only through proper Pillar II supervisory review can we understand the true risk profile of banks, so that capital requirement is set in line with the risks assumed by banks. To carry out this task, the authorities need to have the right prudential rules in place, as well as the supervisory capability and capacity. At the Bank of Thailand, we are developing prudential standards and risk-focused on- and off-site examination practices and manuals so that each supervisor can work on a common structured approach to risk analysis. Moreover, a lot of resources have gone into supervisory training to equip our supervisors with the necessary tools and build up their sound judgment for the implementation. In parallel, the Bank of Thailand has proposed the New Financial Institutions Businesses Law to the Parliament to give us the necessary legal basis to implement both effective banking supervision and Basel II. To foster Pillar III market discipline enforcement, the authorities are working on an appropriate safety net to replace the blanket guarantee that undermines the functioning of the Pillar III. It’s obvious that without lifting the blanket guarantee, market discipline will not work no matter how much disclosure is required. At present, the Ministry of Finance is in the process of reviewing the draft legislation on Deposit Insurance Agency before submitting it to the Parliament.
This is then followed by a discussion on the authorities’ major policies to further strengthen financial institutions’ positions in view of more intensified competition and changing financial environment, including the implications of these policies. Finally, I will conclude this morning’s talk by highlighting some challenges and benefits of capital market development for the banking sector. The Thai financial system consists of four main institutional categories, in the order of their importance: the banking sector, the capital market, specialized financial institutions and non-bank financial intermediaries. The first two categories are the backbone of the Thai financial system, while the third provides funding for specific developmental purposes in accordance with the government policy, and the last supplements the others. Despite the stock exchange boom last year and the pick up of the bond market in recent years, the banking sector remains the primacy of our financial system in every sense. Not only does it provide the bulk of lending that amounted to about 5.5 trillion baht as of end-2003, or equivalent to 93 percent of GDP, the banking sector also mobilizes savings from the public and provides means of payment and settlements that sustain the well-functioning economy. With the recapitalization effort and commendable operational improvement, the banking sector has emerged much stronger after the 1997 crisis, with all performance indicators pointing to the direction of resiliency. The banking sector’s net profit has turned positive for the past three years; this figure more than doubled in 2003 from the previous year.