Chart 1: Stock of conventional gilts £ billions 900  Private sector holdings  800  MPC purchases  700 600 500 400 300 200 100 2006  BIS central bankers’ speeches  2007  2008  2009  2010  2011  0 2012  7  Chart 2: Gilt yields and equity prices Index  Per cent 6 QE2 5  4000 QE1  3500 3000  4  2500  3  2000 1500 15-year gilt yield (right-hand scale)  1000  FTSE All-Share (left-hand scale)  2 1  500  0  0 07  08  09  10  11  12  Chart 3: Changes in gilt yields & purchases around 9/2/2012  8  BIS central bankers’ speeches  Chart 4: Simulated fund deficit (100% funded in 2007) % of fund's initial liabilities Cumulative changes in liabilities Cumulative changes in equities (inverted) Cumulative changes in fixed income (inverted) Deficit  50 40 30 20 10 0 -10  Start of QE2  Start of QE1  -20 07  08  09  10  11  12  Chart 5: Simulated fund deficit (100% funded in 2007), ex QE % of fund's initial liabilities Cumulative changes in liabilities Cumulative changes in equities (inverted) Cumulative changes in fixed income (inverted) Deficit  50 40 30 20 10 0 -10  Start of QE2  Start of QE1 07  BIS central bankers’ speeches  08  09  10  11  -20 12  9  Chart 6: Deficits with and without QE (100% funded in 2007) % of fund's initial liabilities 40 QE2  QE1  30 20 10 0  Including quantitative easing Excluding quantitative easing 07  08  09  10  11  -10  12  Chart 7: Deficits with and without QE (70% funded in 2007) % of fund's initial liabilities QE1  QE2  60 50 40 30  Including quantitative easing  20  Excluding quantitative easing 10 07  10  08  09  10  11  12  BIS central bankers’ speeches  Chart 8: International 10-year sovereign bond yields UK nominal yield US nominal yield  UK real yield Per cent 12 US real yield 10 8 6 4 2 0 -2  1992  1997  2002  2007  2012  Chart A: Gilt yields and corporate bond yields Per cent 9 8 7 6 5 4 3 AA sterling corporate bond yield  2  15-year gilt yield  1 0  07  BIS central bankers’ speeches  08  09  10  11  12  11  Chart B: Simulated fund deficit (100% funded in 2007, liabilities discounted by AA corporate bond yield)  Start of QE1  % of fund's initial liabilities 40 Start of QE2 30 20 10 0 -10 -20  Impact of corporate bond spread on liabilities Cumulative changes in liabilities due to gilts Cumulative changes in equities (inverted) Cumulative changes in fixed income (inverted) 07 08 09 10 11 12  -30 -40 -50  Chart C: Simulated fund deficit (100% funded in 2007, liabilities discounted by AA corporate bond yield), ex QE  Start of QE1  % of fund's initial liabilities 40 Start of QE2 30 20 10 0 -10 -20  Impact of corporate bond spread on liabilities Cumulative changes in liabilities due to gilts Cumulative changes in equities (inverted) Cumulative changes in fixed income (inverted) 07 08 09 10 11 12  12  -30 -40 -50  BIS central bankers’ speeches  Chart D: Deficits with and without QE (100% funded in 2007, liabilities discounted by AA corporate bond yield) % of fund's initial liabilities 40 Including quantitative easing 30  Excluding quantitative easing  20 10 0 QE1  QE2  -10 -20  07  08  09  10  11  12  Chart E: Deficits with and without QE (70% funded in 2007, liabilities discounted by AA corporate bond yield) % of fund's initial liabilities 60 QE1 QE2 50 40 30 20 10  Including quantitative easing Excluding quantitative easing 07  BIS central bankers’ speeches  08  09  10  0 11  12  13

The HKMA’s subsidiary, the Hong Kong Mortgage Corporation (HKMC), which was set up with an objective of buying mortgage loans from banks to supply the markets with additional liquidity, could hardly find any seller in recent years. 4. And our banks are also highly capitalised. Their average Capital Adequacy Ratio is over 20% whereas the average classified loan ratio stays at low levels under 1%. Therefore, they also do not have a strong motivation to issue capital efficient products like synthetic securitisation. 5. However, that does not mean that this will always remain the case, and there is no place for structured credit products here. There are a few factors that can spur the further development of these products in the coming years. 6. First of all, Hong Kong has always excelled as an international financial centre that serves not just the local economy, but also the whole region in the Asian time zone, especially the Mainland of China. Everyone knows the success of the Hong Kong equities market. It is disproportionately large compared to our GDP, but it is still growing at a rapid pace with a strong pipeline of IPOs of companies from the Mainland and elsewhere. 7. In the bond space, there is a fairly common misconception that we do not have a bond market to speak of.