That is what happened in 2007–08. As the IMF have pointed out differences in capital ratios failed to predict which financial institutions would be vulnerable in the crisis (IMF, 2009). Only very much higher levels of capital – levels that would be seen by the industry as wildly excessive most of the time – would prevent such a crisis. Second, the Basel approach calculates the amount of capital required by using a measure of “risk-weighted” assets. Those risk weights are computed from past experience. Yet the circumstances in which capital needs to be available to absorb potential losses are precisely those when earlier judgements about the risk of different assets and their correlation are shown to be wrong. One might well say that a financial crisis occurs when the Basel risk weights turn out to be poor estimates of underlying risk. And that is not because investors, banks or regulators are incompetent. It is because the relevant risks are often impossible to assess in terms of fixed probabilities. Events can take place that we could not have envisaged, let alone to which we could attach probabilities. If only banks were playing in a casino then we probably could calculate appropriate risk weights. Unfortunately, the world is more complicated. So the regulatory framework needs to contain elements that are robust  6  BIS Review 140/2010  with respect to changes in the appropriate risk weights, and that is why the Bank of England advocated a simple leverage ratio as a key backstop to capital requirements.
To achieve greater and more sustainable SME financing, it is necessary to develop market-based approaches which are commercially viable to mobilise private sector investment into the SME sector. I encourage the ADB to further work on this front, including exploring possible mechanisms such as credit enhancement and securitisation. Scaling up private sector lending would require a change in the skill mix of the ADB, in particular in strengthening its market expertise and risk management. Partnering with domestic agencies and private sector financial institutions, other international financial institutions and developed members in the region that have relevant experience would be useful in utilising their expertise, building the capacity of the Bank, and sharing credit risk. There are, of course, other important areas concerning the development of the region where the ADB could play a meaningful role as identified in the new Long-Term Strategic  BIS Review 55/2008  1  Framework. As a member of the Bank and the region, we stand ready to provide support and look forward to strengthening our cooperation with the ADB in furthering the development agenda of the region. And lastly, to successfully implement Strategy 2020, further enhancing the organisational effectiveness of the ADB will be of critical importance. We welcome the Bank’s commitment to develop a more robust results framework and to continue its institutional reforms, and we look forward to ongoing efforts by the Bank in this regard. Thank you. 2  BIS Review 55/2008