The sector is in a phase of downsizing and structural change that will inevitably affect financial intermediation going forward. To think about how this will impact European and global growth, I think it is useful to recall an ancient Chinese fable. The fable is about a boy who lived near China’s northern borders, and whose horse one day wandered off into the territory of the northern tribes. Everyone commiserated with him for his misfortune. But not his father, a well-practiced Taoist. “Perhaps this will soon turn out to be a blessing,” he said. Then, a few months later, his horse returned, accompanied by a fine horse from the north. Everyone congratulated him for his luck, but his father was more sanguine. He remarked, “Perhaps this will soon turn out to be a curse”. The boy quickly became fond of riding the fine new horse, then one day out riding, he broke his leg in a nasty fall. Everyone again commiserated with him. But once more his father disagreed. “Perhaps this will soon turn out to be a blessing,” he said. Soon after, the northern tribes invaded the border regions. All able-bodied young men took up arms to fight the invaders, and nine out of ten died. Due to his broken leg, however, the boy did not join in the fighting. He and his father therefore survived.
Similarly, in our case, the Bank of Thailand recently launched the Financial Sector Master Plan 2, in which we outline the key principles and guidelines for further strengthening of the financial sector over the next five years. Chief among the agenda are our commitments to bring down financial transaction costs through further deregulation and promotion of more competition in the banking industry. The second element of financial soundness is the integrity aspect. That is, financial institutions must be sufficiently immune to “runs”, which I define loosely as correlated and large-scale withdrawals of deposits, triggered by sudden loss of confidence in the solvency of banks concerned. On this, a key lesson for emerging markets from the global financial crisis is that the push for financial market development must be accompanied by constant efforts to review and bolster as necessary the supervisory framework and standards, so that financial soundness can be ensured without compromising the financial system’s integrity. The third and last element of financial soundness is the stability aspect. The financial sector, while playing an important role in supporting the real economy, can at the same time be the source of risk and instability to the real sector. As we know, the spillover effects from financial to real sector can take many forms. For example, the tendency for financial institutions to extend more credit during economic upswings, and scale back lending precisely during downturns, can contribute to the amplitude of the business cycles.