Such limits need to be fundamentally re-evaluated. We have sleepwalked into a world in which leverage of 20 or 30 times capital is the rule rather than the exception. Now is a good time to wake up. Evidence from the not-too-distant past suggests there may be less to fear  BIS Review 139/2009  7  from materially higher capital ratios – say, a multiple of current ratios – than some would suggest (Chart 2). •  Recalibrating risk weights: With hindsight, the capital assigned to certain categories of high-risk and off balance sheet transactions by Basel rules was far too low. Those mis-calibrations were then arbitraged by the banks in ways which included inflated trading books and an over-expansion into high-risk loans and securitised assets. The Basel Committee has already set about trying to correct some of the more obvious of these defects. For example, materially higher risk weights are set to be introduced for trading book assets from the end of 2010. This will include, importantly, securitised and re-securitised products, whose payoffs profiles too closely resembled deep out-of-the-money options (Figure 3). New risk weights should better reflect the tail risk these products embody. These reforms will close a regulatory loophole and thereby lower the beta of, and hence systematic risk in, the banking system. They leave open some rather more fundamental questions, which the Basel Committee are also considering. These include whether the distinction between banking and trading books, and the resecuritisation of assets, are necessary in the first place.

While affected by the crisis, the effects on the domestic economies and financial systems have been relatively contained. Importantly, financial  2  BIS central bankers’ speeches  intermediation has not been disrupted, and the financial systems have continued the supply of credit to support the real economy. Following the Asian financial crisis, wide-ranging financial reforms were undertaken to strengthen the financial systems of the region. The building of sufficient capital and liquidity buffers during good times provided the ability to support the continued credit intermediation process. Improved regulatory and supervisory approaches, underpinned by enhanced governance and risk management practices, have enhanced financial stability in the region. Enhanced surveillance arrangements and a wider range of policy tools have placed policymakers in better state of readiness to deal with problems in the financial system pre-emptively. Macroprudential policies have also been extensively relied upon to mitigate the risks from excesses and imbalances in the financial system. Continued efforts were also made to further advance financial sector development in the region. In particular, the development of the domestic bond market has served to reinforce the foundations for financial stability in Asia. Financial activities have also remained generally anchored by productive real economic activities. In addition to the region’s strong external position, high international reserves and more flexible exchange rates have also enabled Asia to absorb and adjust to changing external conditions. The increasing cohesiveness of Asia is also a core strength and source of stability for the region.