In the past several years, the Bank of Thailand has implemented a comprehensive framework of policy measures to strengthen financial institutions, aiming at both market and regulatory reforms. In the earlier phase, the measures primarily aimed at ensuring recovery of financial institutions from the damages of the 1997 crisis, so that they can resume normal operations that support the economic growth. Thus far, these measures together with the commendable adjustments by the financial institutions themselves, aided by economic recovery, have met with considerable success. Since 2001, financial institutions have returned to profitability, showing improvement in business operations and risk management, corporate governance and management, and, importantly, fortified financial position with strengthened capital base.

Among the key forces of change is the market-oriented risk-based regulatory reform, which provides flexibility for financial institutions to adapt their business model to match their strategy and targeted niche, employing new financial technology, including information technology. Market adjustments have been served by such mechanisms as entry of strategic business partners, consolidation, business partnership on new niche market, out-sourcing and in-sourcing. These tools have allowed financial institutions to increase efficiency, rationalize operations, as well as increase revenue by expanding business scope. At the same time, the authorities have been instrumental in helping them deal with the problem of debt overhang, particularly with the setting up of the Thai Asset Management Corporation (TAMC). Importantly, the authorities. regulatory regime has shifted to risk-based supervision to cope with the evolving business and risk profiles of the institutions, while placing an ever-increasing responsibility and accountability on Board of directors of financial institutions.

Looking to the future, there are major challenges ahead. The Bank of Thailand aims at ensuring a sound and efficient financial system that can support sustainable economic development.  This means the financial system should employ innovative market mechanisms and instruments to serve the needs of the entire economy, including the formerly disenfranchised population in the rural and poor areas. At the same time, the authorities intend to ensure that financial institutions are alert to face the dynamism of global forces of changes, such as the emergence of financial products, innovations, information technology, cross-border competitions, and regulatory changes such as the New BIS Capital Accord.

Towards this aim, the Bank of Thailand is drafting the Financial Sector Master Plan to ensure comprehensive and consistent market and regulatory reforms. In parallel, the critical regulatory reforms in the pipeline include the new Financial Institutions Businesses Act and the Deposit Insurance Agency Act. Moreover, we are improving early warning system, strengthening internal risk management, institutionalizing contingency planning of the Bank of Thailand, and further developing payments system with Payment System Master Plan 2004. These developments would ensure efficient risk-based supervision and financial infrastructure at par with international standards and best practice.

M.R. Pridiyathorn Devakula
Governor,
Bank of Thailand

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