I foresee a number changes in the Thai financial sector, which will make the operating environment for local banks more challenging.

The first change is increasing competition among banks and non-banking financial institutions. The trend towards offering clients a widening range of products and services is becoming a significant competitive factor in the banking sector.

Non-banking financial and non-financial companies, intermediaries and sellers are competing with banks on some products and services.

In expanding the range of products and services they provide, banks should be relying on financial groups, making use of economies of scale and increased market segmentation, and offering combined products.

The second change is the increasingly blurred distinction between different types of financial institutions.

Over the past decade there has been an increasing convergence between the activities of investment and commercial banks because of the deregulation of the financial sector. Many banks now can compete directly in money-market operations, private placements, project finance, underwriting of bonds and financial advisory work.

Furthermore, the modern banking industry has brought greater business diversification. Many banks have already entered into investments, underwriting of securities, portfolio management and the insurance business.

Taken together, these changes have made banks an even more important entity in the business community.

The third change is greater sophistication of financial products and services brought about by financial innovation. It is a clear trend that banks are becoming complex financial organisations that can offer a wide variety of services to international markets. Supported by the latest technology, banks are trying to identify new business niches, develop customised services, implement innovative strategies, and capture new market opportunities.

The fourth change is the greater influence of the 'Three Pillars' for international standards in banking supervision, and the need to operate under these pillars. Minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2) are being reinforced by transparency requirements (Pillar 3), which are designed to facilitate a complementary use of market mechanisms for prudential purposes.

Last but not least, is increasing consolidation in banking. There is continuous development of financial groups, which means banks can increase their effectiveness, make use of retail networks within the financial group, increase the benefits for clients by providing a comprehensive service and offering combined products, and to develop cross-selling of the group members' products.

Banks thus have a share in the results of other financial-market entities. By being part of financial groups, they can diversify both their activities and their risks.

The process of concentration through mergers and acquisitions is governed by the need to be competitive and to cut costs. For example, over the past 10 years, the number of credit institutions in the European Union has fallen by 35 per cent - an average decrease of 440 institutions a year.

In summary, to meet the needs of a new era, local financial institutions cannot afford to tinker at the edges. They need to rigorously pursue rapid change.

Basically, the change should involve refocusing banks' businesses to areas where they can build the greatest competitive advantage. Then banks should raise skill levels in such areas as leadership, human resources and risk management to achieve international standards of competitiveness.

Dr Chodechai Suwanaporn is director of the Financial Policy Section at the Fiscal Policy Office of the Finance Ministry. He can be contacted at chodechai@fpo.go.th.

Chodechai Suwanaporn

The Nation