This framework mainly contains five central elements: The first is the strengthening of the quality and quantity of bank capital, and a harmonisation of the calculation of regulatory capital across jurisdictions. Better and higher bank capital is needed in order to foster the loss-absorbing capacity of banks. To this aim, Basel III increased the minimum common equity Tier 1 (CET1) ratio from 2% to 4.5% of risk weighted assets. The second is the requirement for banks to build-up buffers above the required minimum, particularly when the economy is booming, thereby providing for additional cushions to absorb losses in periods of financial distress.2 In addition, further buffer requirements are foreseen for systemically important financial institutions (SIFIs) as well. The third element is directed to enhance the “risk coverage” of the regulatory framework, providing a more comprehensive treatment of banks’ exposures to complex financial products whose risk to the system has been neglected so far. The fourth element is the adoption of a simple and transparent rule to prevent the excessive reliance on debt by the banking sector. And last, but not least, the new framework intends to improve banks’ resilience to liquidity shocks and to increase market confidence in the liquidity position of banks. The intended improvements in the liquidity position of banks aim at containing the excessive reliance on short-term funding and give incentives to hold safe and liquid assets.
Peter Pang: Promoting and maintaining financial stability in Asia through cross-border co-operation Remarks by Mr Peter Pang, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Hong Kong Monetary Authority – Bank of Thailand Joint Press Conference on the launch of US dollar – Thai Baht PvP link, Hong Kong, 15 July 2013. *  *  *  Deputy Governor, ladies and gentlemen, I would like to thank the Bank of Thailand for co-hosting this press conference with the Hong Kong Monetary Authority (HKMA). It is my great pleasure to join Deputy Governor Mr. Krirk Vanikkul to announce the implementation of the payment-versus-payment (PvP) link between the Thai Baht Real Time Gross Settlement (RTGS) system in Thailand and the US dollar RTGS system in Hong Kong. This PvP link sets another excellent example of central bank cooperation to provide solutions to enhance regional financial stability and to meet market needs. In particular, it will make a significant contribution to addressing the current principal risk in the USD-Thai Baht foreign exchange (FX) transactions that arises from buyers of USD paying Thai Baht in Asian time ahead of receiving US dollar in US time the next day. For technical people in the payment field, this is often referred to as the “Herstatt” risk which brought down the Herstatt Bank in Germany in 1974.