And even after the crisis has peaked, banks still face the problem of recapitalization. During these times, the process of intermediation suffers. The existence of a deep and liquid bond market allows financial institutions to prepare themselves better for risk management. The authority can require the banks to maintain a higher liquidity ratio, comprising both government and top-rated corporate bonds. The banks can then resolve their liquidity problem on their own by selling these bonds, regardless of their credit standings, which tend to suffer during a crisis. In Thailand, the lack of a liquid bond market meant that the only way to obtain liquidity under pressure was for the banks to come to the Bank of Thailand using their entire loan portfolio as collateral. And as the crisis deepens, these loans were deteriorating day by day. Another benefit of the bond market is that it can attract foreign investments. Foreigners can bring in funds to invest in high quality papers denominated in Thai baht. They are the ones to absorb foreign exchange risk. Without a bond market, Thai companies have no choice but to borrow abroad and bear the foreign exchange risk, themselves. Experience has shown that they have yet to fully develop their skills in doing so. It is our intention, therefore, to expedite the promotion and development of the domestic bond market. The process is very time-consuming, but they are worthwhile for they provide the foundation for a strong and diversified financial market that would be more resilient to future shocks.
Necessary conditions for bond markets To develop a domestic bond market, we need three essential components:  1  BIS Review 30/2000  First, there must be a deep and liquid government bond market to serve as a benchmark against which corporate papers can be priced. To ensure that the government bond market can continue to provide the benchmark yield curve, the supply of government bonds must be regular, predictable and transparent. In short, the framework of the budgetary process as well as debt management operation must support the continuing supply of bonds through operations such as automatic refinancing or refunding of maturing debt. Tools such as re-opening of benchmark issues, government bond buy-back schemes or repurchase operations are also essential for the efficient functioning of debt management operation. Second, there must be adequate infrastructure, both legal and operational, to support the trade and transfer of instruments and funds. Operational infrastructure includes such things as a delivery versus payment system that is safe, rapid and efficient to ensure finality of fund transfers. An efficient bond registration system is also essential to provide legal protection of ownership of bonds. Rules and regulations to support trading and financing operation such as repurchase agreements, securities lending, short positioning as well as hedging practices are all essential elements. Third, there must be a pool of market participants comprising both intermediaries such as dealers or inter-dealer brokers as well as end-users such as mutual funds, provident and pension funds, insurance.