norman t l chan : excessive leverage – root cause of financial crisis speech by mr norman t l chan, chief executive of the hong kong monetary authority, at the economic summit 2012 “ roadmap to hong kong success ”, hong kong, 9 december 2011. * * * 1. following the outbreak of the global financial crisis in 2008, it is now generally recognised that serious imbalances in the global economy have been built up over the past 10 – 20 years. there are many different theories on how these imbalances came about and on their contributions to the global financial crisis. a commonly held theory in western countries attributes the global imbalances and the financial crisis in the us and europe to the so - called “ savings glut ” in the emerging market economies ( emes ), especially china. in other words, the problems and miseries being experienced in the us and europe arose because the emes not only over - exported, over - saved and under - spent, but also have been lending moneys at very low rates to the industrial economies and have financed the consumer booms and fuelled the credit and asset bubbles there. i do not subscribe to this view. however, given the complexity of the global financial system, it is very hard to try to come up with a grand theory that can fully explain what has gone so badly wrong that it has resulted in the worst global financial crisis since the world war ii. having said that, i would still venture to identify the root cause of the global financial crisis. in so doing, it is inevitable that one has to simplify and generalise matters considerably so as to draw some conclusions. 2. in my view, regardless of the causes of the global imbalances, both the global financial crisis in 2008 and the current european sovereign debt crisis have been driven by excessive leverage in private and public sectors alike in the major industrial economies, resulting in dangerously high levels of debts. in 1980, the average debt level of the 18 major industrial economies was at 165 % of gdp. in 2010, the ratio rose drastically to 320 % of gdp. in the us, the debt - to - gdp ratio remained stable at 150 % from mid - 1950s to early 1980s, but the ratio rose sharply and steadily to slightly under 300 % in 2010. 3. why did households, companies and governments borrow so much more than before in the past decade or two? some put the blame on financial innovation, such as securitisation, which

bank credit in an easier and cheaper way than before. 45. we ’ re also looking to apply new technologies to addressing long - standing pain points in banking. take international remittances for example. the process is currently slow and costly. along with the bank of thailand, the hkma initiated a central bank digital currency project for cross - border payments that has now been joined by the central banks of the united arab emirates and china. this ‘ m - cbdc bridge ’ project is exploring the potential of using blockchain technology to facilitate real - time cross - border payments, which could reduce costs and enhance transparency for users. cbdcs have a range of promising applications and, together with our partner central banks, we want to be at the forefront of this development. enhancing the platform 46. we understand that a supportive regulatory environment matters a great deal to the providers and users of financial services. that ’ s why the hkma and other financial regulators are working closely with the government to keep enhancing the attractiveness of the hong kong platform. we keep our market infrastructure, legal framework, regulatory regime and tax system under constant review to make sure that they are business - friendly, forward - looking and competitive. 47. in recent years, we ’ ve been undertaking reforms that provide modern legal structures catering to the evolving needs of the asset management industry. and we are revising our tax code to make it more competitive for a wide range of financial services, including corporate treasury activities, the fund industry, private equity and wealth management. closing remarks 48. ladies and gentlemen, i started my speech with the question why hong kong is irreplaceable. in the past 15 minutes or so i highlighted the strength of hong kong ’ s ecosystem as an international financial centre, the scale of opportunity ahead and the actions we are taking to maintain our competitiveness. i hope you will agree with me that hong kong ’ s exceptional resilience under recent pressure reinforces – rather than calls into question – its long - term future as a global financial hub. 49. the legal profession has an important role to play in this journey, and i look forward to our continued close collaboration. 50. thank you. 5 / 5 bis central bankers'speeches