Better resolution tools, which would be needed if CoCos are not enough, can lessen the dilemma and are an essential part of the reform programme. They give the authorities extra options such as creditor bail-in through write-downs or debt-for-equity conversions. They provide a statutory backstop, enabling bail-in of private sector creditors. As such, they are a necessary ingredient for restoring market discipline. CoCos buttress market discipline and help lift the authorities from the horns of the timeconsistency dilemma. They augment regulatory discretion at the point of distress with contractual rules well ahead of distress. Capital replenishment is contractual and automatic; it is written and priced ex-ante and delivered without temptation ex-post. Because intervention would be prompt, transparent and rule-based, the scope for regulatory discretion would be constrained. For that reason, the time-consistency problem ought to be reduced, perhaps materially. A contractual belt is added to the resolution braces. To achieve these benefits, change would be needed to banks’ capital structure. But this reconfiguration would not be especially dramatic. Indeed, it would be as simple as CDE: C(oCos) + D(debt) + E(quity). The layer of bank equity would be augmented with a layer of CoCos, with slices defined by market-based triggers. Banks’ capital would comprise multisliced equity, some actual, some contingent. In some respects, this model is not greatly dissimilar to the one recently proposed by the Swiss banking commission.14 In achieving this capital structure, one option would be for regulators to require it, as in Switzerland.
Ladies and Gentlemen, In this context, from an emerging market perspective, the question, therefore, goes way beyond just how to cope with the current turmoil, but reaches deep down into the direction of market development over the medium to longer term as well. Within the realm of central banks, for example, the traditional science of monetary policy has so far been based on the idea that the central bank’s objective should be to maximize the economic well-being of the people in the country by minimizing the deviations of inflation from its optimal rate and the deviations of real economic activity from its so-called natural growth path. However, today it is clear that the central bank’s role in fostering financial stability is essential and this role will become more prominent in the world of increasing financial integration. Experiences of the recent crises indicate that monitoring financial imbalances is crucial in preventing financial turmoil from occurring. It has long been recognized that a weak financial system undermines the efficacy of monetary policy measures and can overburden the monetary authorities. For this reason, it may be desirable for prudential policy frameworks to be strengthened, thereby addressing the build-up and unwinding of the imbalances more effectively. In this context, the Bank of Thailand has also monitored seven areas of financial imbalances, including those in the financial market, real estate, household and corporate sectors on a regular basis.