Recent experience does not suggest that the interbank market is special or that keeping an abundance of excess reserves prevents effective monetary policy implementation. Further, we should be mindful of the fact that banks may not be as eager to trade as much with each other in the new regulatory environment because they now face costs of expanding their balance sheet. In the U.S., the leverage ratio has been increased and the Federal Deposit Insurance Corporation has modified the base for the insurance fee it assesses on banks, effectively making it a function of the bank’s liabilities or the size of its balance sheet in excess of capital. 8 To understand why interbank trades are costly in this environment, consider the following example. Suppose Bank A has too many reserves and Bank B too few. One way to transfer reserves from Bank A to Bank B is through an interbank loan. The size of the balance sheet of Bank A would not change as a result of such a loan because the reduction in reserves would be offset by the loan to Bank B. The balance sheet of Bank B would increase in size by the amount of reserves it receives, as shown in upper part of Figure 4. What this example  6  In theory, the discount window should reduce some of this volatility. In practice, stigma has prevented it from playing that role effectively, as I will discuss further. 7  Nonbank lenders’ use of counterparty credit limits suggests such monitoring indeed occurs.
•  Five of the top 10 primary growth markets will be in the Asia-Pacific; this includes China, India, and Indonesia. There are three structural factors driving demand for insurance in Emerging Asia. First, Asia is getting richer. Projections by the IMF show that Emerging Asia will remain the fastest growing region in the world over the next decade. As incomes rise in Asia, governments, corporates, and individuals will increasingly seek insurance to protect their growing economic assets. •  Burgeoning urbanisation, infrastructure development, and cross-border trade will drive demand for commercial and specialty insurance. •  A growing middle class and rising affluence will underpin a steady increase in life and health insurance penetration rates. Second, Asia is getting older. Asia is facing declining fertility rates, increasing life expectancy, and a rapidly ageing population. •  The United Nations projects that, by 2030, Asia’s old age dependency ratio will be 16%, up from today’s 11%. •  Against this demographic backdrop, public retirement and pension systems in Asia remain inadequate. The retirement gap between savings and retirement needs can be as high as 13 years. •  This will spur greater demand for private health insurance, annuity and other retirement security products. Third, Asia is becoming more aware of catastrophic risk. •  Over the last 30 years, Asia has borne the brunt of natural catastrophe losses, accounting for almost half of the world’s estimated economic losses from natural disasters. Yet less than 5% of the losses were insured, compared to 40% in advanced economies.