tolerance is highest for low impact firms while, for obvious reasons, we have a very low tolerance to failure in the highest impact firms. we are prepared – no – more than that – we expect some low impact firms to fail each year. i will return to the subject of the supervision of low impact firms in more detail later. for the moment i want to stress that we require all low impact firms to comply with the appropriate prudential and consumer regulations just as much as we require our higher impact firms to comply with such regulations – but we accept that, in any market economy, firms will be created and they will fail for a whole variety of reasons. when they fail, we will work to ensure that the rights of customers are appropriately protected according to the law, supported by the extensive retail consumer protection framework in ireland. we will also work to ensure appropriate cancellation of permissions and winding up in accordance with insolvency regulation. as you would expect our risk appetite for such failure in our highest impact firms is markedly less. we do not expect these firms to fail regularly and, when it appears that it is possible they are at risk or may fail, you will find us working pro - actively to mitigate the risks. we will work to ensure that, if there is to be failure, that it is not disorderly and that there is no requirement for taxpayer support to preserve financial stability. bis central bankers ’ speeches how we will implement our risk appetite? the first stage in implementing our risk appetite is through investigating and challenging the firms we regulate. we are deploying a set of engagement tasks which are designed to help us understand the firms better and to put us in a place where we can effectively unearth and discuss the key issues with a firms ’ leadership team, with a view to achieving swift and effective mitigation where necessary. to make this approach plausible, we have been investing in practical training for supervisors to help them conduct high quality qualitative and quantitative evaluations of firms. we have also recruited a considerable number of staff with deep industry knowledge and we will continue to invest in training all our supervisory teams. as supervisors provide us with feedback on different aspects of different prism engagement tasks we will be able to commission further training to enhance specific skills – thereby further improving performance. this year, for example, we have commissioned focused business model training for some supervisors, to ensure they have the requisite skills to evaluate, working with our specialist business model analytics team, the strengths and weaknesses

achieved by market forces. i hope that, looking at the matter from a european perspective, you agree with me. the fact of the matter is that diversity or fragmentation leads to individual vulnerability, and interdependence is synonymous with contagion, particularly financial contagion. this is notwithstanding the low degree of financial integration and varying degrees of financial openness. the ingenuity of the financial community can be relied upon to establish financial linkages, where there is none officially allowed, through which what appears to be unmanageable financial risks can be managed and, consequently, financial contagion can be readily transmitted. the emerging markets of asia provide fertile ground for financial innovation. for example, we hear often that the hong kong financial markets provide a perfect hedge, or more modestly, a proxy hedge, for risks in the mainland of china or the region. there is an element of truth in this. after all, this is one of the roles of an international financial centre. but it does mean that, in asia, the dynamics of financial contagion can be quite complex. for example, financial crises do not necessarily erupt and manifest themselves at source - somebody sneezes and others get pneumonia. so, it is only prudent that asian monetary co - operation should be on the agenda of discussions on asian finance, and i have been urging for greater co - operation for some time. i am therefore glad that there has been increasing attention given to the subject in recent years. but, in terms of actual co - operative initiatives, progress has been slow and the scope rather narrow. to be fair, there is consensus on the need for diversification of financial intermediation channels, for enhancing efficiency and financial stability, and this consensus has been manifested in co - operative efforts to develop the bond markets in asia. there are three clusters of initiatives : " what is driving asian exports? ", hkma, august 2003. • the first is the apec initiative on the development of securitisation and credit guarantee markets, which is spearheaded by three apec member economies, namely, hong kong, thailand and korea, and sponsored by the world bank ; • the second is the asian bond market initiative ( abmi ) of the asean + 3 forum ; and • the third is the asian bond fund initiative of emeap, comprising eleven central banks in the region, which has successfully launched abf1, denominated in us dollars and has been working