The current effort of FSB to survey unintended consequences of reforms on emerging market is welcomed. 2  BIS central bankers’ speeches  Before ending this note on Basel III, let me touch on Thailand’s own take on these developments. For Thailand, we aim to adopt the Basel III framework in accordance with Basel Committee timeline. After industry consultation, we believe that Thai banks will be well placed to implement the Basel III framework as their capital positions are well above the minimum requirements of 8.5%. The Basel III framework will help strengthen the bank’s capital and risk management. One of the major improvements of Basel III from Basel II is consideration on cyclicality, with requirement for conservation and countercyclical buffer. However, we believe that prudential measures, such as conservative provisioning designed to be countercyclical, should also be given due credit for achieving the same aim when implementing Basel III buffers. This would help avoid the double requirement on capital maintenance. Of course, we strongly support a better treatment of trade financing, to ensure that Basel III is supportive of stable economic growth. On the last note, let me turn to a key trend in Asia, “regional economic and financial integration”. Asia faces a challenge of steering a balance between liberalization and strengthening regulation. ASEAN Economic Integration under AEC, which sets the landmark date of 2015, has progressed substantially on the free flow of goods and services, as well as direct investment. Financial sector integration is also set to speed up.

One of the most important and immediate consequences would be impact on trade finance which is a critical issue for emerging economies and Asia. This is because our economies and financial structure is more dependent on it, compared to some western economies. Let me elaborate. International trade is a major driver of GDP as our export is part of the global and increasingly integrated regional supply chain. However, many of our exporters are SMEs not large conglomerate. These local SMEs rely on bank financing, as our financial system remains more bank-based than market-based. Supplier of trade financing is still banks in western countries, especially European banks. The deleveraging of European banks can reduce the supply of trade financing and impact growth and development. To address this, it is important that Basel Committee recognizes that trade financing has relatively large impact on Asia, compared to the western economies for which Basel III is mainly geared. Treatment of trade financing in leverage ratio framework will create incentive for banks to shift away from trade financing towards other types of financial transactions, including derivatives which have lower impact on leverage ratio, but can earn higher return. This is because they are assigned lower credit conversion factor even though trade financing is less complex, more familiar, has low liquidity risk as they are self-liquidating, and most importantly, it clearly serves real sector. We believe these rationales argue for a more appropriate treatment of trade financing to ensure that the Basel III framework is appropriate for Asia.