Developing the Efficient and Resilient Financial System for Thailand: Lessons from the Crisis and Challenges Ahead

The purpose of this paper is to discuss and raise important policy implications from the U.S. crisis in the Thai context, so as to contribute to the appropriate and forward-looking policy design for the Thai financial. Issues discussed in this study involve: (i) financial linkages and systemic risk assessment; (ii) procyclicality of the financial system; (iii) appropriate regulatory arrangement, bank governance and executive compensation. Regarding the systemic risk issue, we found evidence of negative externalities imposed onto the banking system value-at-risk (VaR) by banks and other types of financial institutions such as finance, securities and insurance companies. Therefore, bank regulators needs to be aware of the additional risk imposed onto the system during distress time and take this into account when assessing the risk level of banks. Next, the results from panel data regressions suggested that the level of procyclicality decreased from the pre-Asian Crisis period when compared to the post-crisis period. Moreover, the nature of cyclicality differed by asset classes. Therefore, we proposed that, if their goal was to mitigate excessive cyclicality, supervisors must also take into account types of loans as well. Finally, the paper outlines the importance of implementing regulatory statues that will minimize regulatory arbitrage as well as promoting cautious financial innovations and bank governance, which were identified as a few of the fundamental causes leading to the onset of the U.S. financial crisis.