In pursuit of medium to long-term financial development strategies, the first phase of the Financial Sector Master Plan was implemented in 2004 to rationalize the structure and roles of the existing financial institutions. Banking consolidation was undertaken through mergers within financial groups under the One Presence principle. Of importance is a move toward a new financial landscape with approval for ten applications so far under the new licensing scheme, which covered three new commercial banks, four retail banks, two full branches and one subsidiary. This is the first time that banking consolidation was driven by strategic positioning, rather than by necessity, leading to a more competitive and efficient financial system. As redundant functions have been removed, the scope of business of existing foreign financial institutions has been expanded to introduce additional pressure and strengthen the overall financial system.

Equally important is implementation of prudential measures to rein in consumer credit and to expedite NPL resolution, as well as promotion of good corporate governance and risk management capacity in the banking industry. Moreover, the authorities continued to step up efforts to improve the infrastructure that underpins a more robust financial system.  One point in case is development of the central clearing and settlement for debt instruments to enhance the functioning of the payment system and the efficiency of the capital market. With financial stability assured and further reforms being pursued, financial institutions should, therefore, be in a stronger position, poised to meet challenges brought by intensified competition.

To set a roadmap for supervisory enhancement on all fronts, the Bank of Thailand conducted a self-assessment exercise on effective banking supervision against the Basel Core Principles during the year. This benchmarking helped identify gaps in current supervisory practices and remaining infrastructure weaknesses. Further supervisory improvements will build upon these findings to meet the more demanding global banking standards. In line with this, the International Accounting Standard 39 will reflect more accurately the positions of financial institutions, while the New Capital Accord will provide the basis for determining risk-sensitive minimum capital requirements. In order to meet the target timeframe for Basel II implementation, a series of consultative papers on credit risk are being issued, and will befollowed-up with other elements by late 2005. These developments pose challenges for both banks and regulators in many countries worldwide, and Thailand must carefully map out our implementation plan that is consistent with the overall objectives while ensuring a smooth transition process.

Another concern from the external front deals with potential financial imbalances.  With increasingly integrated financial markets, developments in systemically important countries could potentially induce volatility in the banking system of small countries. For example, US current account imbalances and expectations on the Chinese renminbi revaluation could have important implications for macroeconomic and financial stability, and consequently, financial institutions. Against this potentially unstable environment, the authorities need to monitor closely global downside risks and react immediately, if required, to maintain macroeconomic and financial stability. Concurrently, banks cannot remain complacent but must be prepared to adopt forward-looking strategies and practical solutions to counter pro-cyclical imbalances. Importantly, they must continue to strengthen their risk management capacities further by periodically stress testing their resilience against extreme but plausible shocks.

Against this background, Thailand will undoubtedly face important challenges in the periods ahead - both in terms of our own domestic reforms and international developments. The authorities will therefore have to remain vigilant over macroeconomic management, foster a more robust regulatory framework to accommodate the new financial structure, and address any remaining supervisory weaknesses. As obvious as it may seem, it is important to stress that Thailand๛s financial reform agenda hinges importantly on active participation of all stakeholders, with a firm commitment to achieve a more balanced, resilient, and competitive financial system.

M.R. Pridiyathorn Devakula
Governor,
Bank of Thailand