The practical question is how far systemic surcharges take us in tackling the systemic risk externality. In other words, at current levels by how much have systemic surcharges reduced  BIS central bankers’ speeches  3  expected losses for the financial system? That is an empirical question. To assess it, consider the impact of capital surcharges on the expected losses facing the 29 institutions identified by the FSB. Using each of these banks’ balance sheets, we generate a measure of default probability using the Merton (1974) contingent claims model. We assume that the base level of equity for these banks is 7% (the new Basel III minimum) and that, in the event of default, they suffer losses on their assets of around 30%.4 To keep things simple, banks’ assets are assumed to be (log-)normally distributed, in line with Merton (1974), and default occurs only when a bank’s capital is fully exhausted. Assume initially that default risks across banks are independent. This is a highly conservative assumption, as in practice bank default probabilities are highly correlated at times of stress. Indeed, bank correlation coefficients in crisis often head towards one. For that reason, this thought-experiment provides a lower bound on expected losses across the financial system. Chart 5 shows expected losses across the 29 banks at different levels of the systemic surcharge. In the absence of any surcharge, expected losses across the system are just less than $ billion per year.
Prasarn Trairatvorakul: Current topics of the economy and monetary policy of the Kingdom Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the Japanese Chamber of Commerce Dinner Talk, Bangkok, 25 March 2013. *  *  *  Good evening, Distinguished guests, Ladies and Gentlemen, I would like to thank the Japanese Chamber of Commerce (JCC) for inviting me to give a keynote speech at this special annual event. It is my honor to be back here again for the prominent institution that has its presence in Thailand over half a century, contributing to the development in trade and investment, as well as promoting Japan-Thailand friendship through cultural exchanges and technical support. For this special evening, I would like to reflect on recent developments in the global and Thai economy, and the challenges for monetary policy going forward. First of all, let’s look back to what happened last year. In 2012, Thailand faced a series of challenges from both domestic and external fronts. The global economy was subject to the main drag from the Euro debt crisis, while uncertainties remained on the recovery process of the US and Japan. These advanced countries faced a number of structural problems which would, of course, take time to resolve. However, it was encouraging to see the overall global economy continue on a gradual recovery path, with improving outlook particularly in the US and Japan, while China and Asia remained robust.