Emerging market economies are very vulnerable to the reputational risk of non-compliance. Therefore we must take one step at a time. The infrastructure for compliance - legal, accounting and market - must be established and is an essential pre-requisite which underlies the success of these initiatives. BIS Review 84/2005  1  The implications on the several sub sectors of our economy from Basle II will have to be examined carefully with regard to access to finance and the pricing of risk. Uneven playing fields may arise as a result of the internationally active foreign banks adopting more advanced approaches, thereby improving their competitiveness over their local counterparts. Will the models developed by the foreign banks be relevant for the risks in our markets? These are the regulatory challenges which have to be addressed by the regulators. In meeting these challenges, the local banks must make best use of the existing resources to minimize the cost of full compliance. They can build on their existing data bases and leverage on the default data available in institutions such as the Credit Information Bureau. They can benefit from data pooling within the industry. All these resources must be harnessed. It is important that the banks do not lose sight of the long term benefits of Basle II of better capital allocation and consequently, better pricing, because they are embroiled in the details necessary to meet the deadline. The ultimate objective is financial stability.
Quite apart from our own Hong Kong-specific initiatives, there are movements for reform at the international level, resulting from a very different experience in the more developed economies, which we cannot ignore. This point brings me to my second observation: the need to move with the times. The past year has seen a plethora of ideas and proposals for reforming financial regulations, and interventions by government that were unprecedented in their nature and scale. Even in economies less deeply affected by the latest crisis, including Hong Kong, it has been necessary to deepen government involvement, for example in more extensive deposit guarantees or in more intense supervision of banks' risk management – although it is gratifying that so many of the tools that we have been able to rely on, including the apparatus and contingency arrangements for ensuring liquidity, have been developed in a pre-emptive rather than a reactive way. On the various emergency measures, I am quite sure that in the fullness of time, these will either be turned into standing arrangements or withdrawn, hopefully through smooth exit strategies. But, current sentiment is clearly demanding much closer regulation and supervision of banks over the longer term. Quite what form this will take remains to be agreed on in international forums, although the thinking already seems to be towards improvements in the level and quality of banks' capital; new global standards for measuring, managing and supervising liquidity risk; and macro-prudential supervision to reduce the pro-cyclical dynamics of financial markets.