I shall now describe these tools distinguishing, for the purpose of my address, between those that affect the capital requirements on credit institutions and those that fall on borrowers. Macroprudential tools that affect the capital requirements on credit institutions The banking regulations in force require banks to have sufficient capital set aside to cover unexpected losses and to maintain their solvency in the event of a crisis. The amount of capital required depends on the risk linked to a specific bank’s assets and, in fact, is expressed as a percentage of risk-weighted assets. The concept of risk-weighted assets basically means that a lower capital allocation is attributed to the safest assets, while the riskiest assets are assigned a greater risk weighting. In other words, the riskier assets are, the more capital the bank will have to hold in reserve. In parallel, specific grades are assigned to capital, depending on its quality and on risk.4 First among the macroprudential tools made available to the authorities is the possibility of directly influencing credit institutions’ capital by means of requirements additional to the traditional microprudential capital requirements. This greater requirement of capital increases banks’ loss-absorption capacity and, moreover, influences their appetite for risk, given that the losses that shareholders must bear in the event of difficulty (“skin in the game”) increase as a result. If they are to function correctly, these additional capital requirements must be activated when banks begin to build up risks, and they must be drawn down when risks abate or when they materialise.

With the agreement of the region’s regulatory authorities, this can be achieved through the formation of a regional dealers’ network for the primary and secondary market. Such regional dealers will help to distribute securities around the region and more importantly create the market to facilitate cross-border transactions. In doing so, it creates liquidity in the fixed income market, attracting greater foreign investors’ participation and lowers the cost of funding. ASEAN corporates are thus able to tap into new markets and investors and widen their sources of financing. This contributes to greater depth and breadth of the regional fixed income market. Secondly, as intra-regional trade within ASEAN is becoming more significant with further potential in intra-regional investments, another untapped area is the cross currency foreign exchange market, that could support regional settlement for trade and investment. ASEAN is well positioned to advocate the greater use of regional currencies that will further enhance and deepen regional financial integration via use of regional currencies for trade settlement. The cost of hedging the exchange rate risk will be lower thus it promotes efficiency in trade BIS central bankers’ speeches  3  and enhances export competitiveness of our businesses. We should therefore, work together and double our effort to promote and enhance the use of regional currencies for trade and investment settlement. Sovereign funds managers could also give a timely boost to this effort by investing a fraction of their funds into domestic currencies of regional bond markets.