Although this concept is attractive, there are still many concerns from a regulatory point of view. The Fair Value Option may be inappropriately used and may result in unreliable financial information. For example, when a bank applies the Fair Value Option to its liabilities and is downgraded, the yield for its liabilities will increase to reflect the increased risk. Consequently, the mark-to-market value will be lower than the original value, and the gain is recorded as profit. Therefore, it seems unreasonable that banks can record profit in a difficult period by applying the Fair Value Option to their own liabilities. Ladies and Gentlemen, My last point is that Basel II and IFRS will undeniably bring some fundamental changes to the business of banking. First, banks may need to rethink their operations and strategies on account of the expected greater involvement of third parties. The point here is that new regulations allow banks to use financial models to estimate required capital and fair values of assets and liabilities. This means banks can take advantage of the lower capital requirements by offering cheaper or more cost efficient products to their customers. However, to develop financial models requires a certain amount of data and know-how which a single bank may not have. So, to  BIS Review 114/2007  3  overcome this difficulty, banks may have to seek support for additional credit data from peer banks, rating agencies, or the credit bureau. Second, banks must increase their knowledge base regarding risk management techniques, especially on risk modeling.
Similar to many economies in the region, commercial banks in Thailand will start maintaining capital according to Basel II by the end of next year, and by the end of 2009 for banks with the advanced approach. IAS 39, on the other hand, will be fully enforced by the Federation of Accounting Professions in the beginning of 2010. However, the Bank of Thailand has already adopted some parts of IAS 39, namely the impairment of assets since December last year, and we are now considering adjusting the related regulations to be in line with the concept of IAS 39. For Basel II, preparations on the supervision side started a number of years ago. The Bank has set up several internal working groups to study the guidelines and its suitability to the Thai market. Staff were sent abroad for training on Basel II implementation. Experts from other supervisory authorities and consultants were invited to hold seminar and training on the underlying concepts, applications, and supervision issues. The drafting of the Thai version of Basel II has been quite involving. During the drafting, the Bank of Thailand carefully studied other countries guidelines and consulted with other supervisors to gain insights on the suitability of Basel II to the Thai financial system. As a result, we have made some necessary adjustments to the guideline taking into consideration its practicality. Banks in Thailand have been consulted in the process so that the guideline does not impose extra unnecessary burden.