going to default on our obligations. in fact, in times of extreme uncertainty and heightened risk aversion, the conditions in private repo markets deteriorate quickly and our operations become more attractive. by not adjusting our risk control framework in a pro - cyclical manner, and therefore by maintaining or even enlarging the collateral available to our counterparties facing greater financial distress, we achieve two policy goals. on the one hand, we facilitate the implementation of a monetary policy stance consistent with the crisis environment. on the other hand, we contribute to restoring the value of certain assets by attributing them a liquidity status that the market would not have permitted. the eurosystem risk position : common misunderstandings let me address en passant two issues that have received attention from some analysts recently. first, some commentators have stated that, since the ecb ’ s balance sheet is expanding and is allegedly taking on large risks, the ecb may be turning into a “ bad bank ”. 3 this argument is based on a clear misunderstanding of the type of operations conducted by the eurosystem and of the risk control measures applied to those operations. the description of the risk control measures and of the specificities of the capital position of the ecb that i just provided should help dispel such misunderstanding. the data have actually confirmed that the eurosystem ’ s financial results have proved resilient to the global financial crisis, and its total capital position has even increased. 4 the numbers i have provided in terms of overall capital and reserves of the eurosystem should help a better understanding of the situation. second, some analysts have tried to show that the eurosystem had taken on too much risk, at the detriment of the ecb major shareholder, by looking at the net balances of individual a minimum aaa rating at issuance by two rating agencies is required. over the life of the instrument, it should retain a second - best rating of at least a –. see, for instance, the interview to t. mayer in faz, 14 june 2011, “ die ezb droht zur bad bank zu werden ” ; m. persson, 8 june 2011, “ europe ’ s bad bank, ” the wall street journal. from 5 september 2008 to 3 june 2011, capital and reserves have increased by 13. 2 % ( from €71. 7 to €81. 2 billion ) and revaluation accounts have increased by 100

i mentioned earlier, much of the focus on basel ii has been on irb, and thus on pillar 1. now, credit risk remains, of course, one of the most fundamental risks in banking. however, we in the hkma determined at an early stage in the basel ii process that it would be desirable to broaden the focus so as to bring into the equation the various " pillar 2 risks. " the case for this is, in our view, self - evident, as risks such as concentration risk, interest rate risk in the banking book, and liquidity funding risk can be every bit as devastating for the financial health of a bank as credit risk can be. in the run - up to final agreement on basel ii, therefore, we issued a series of guidance notes to give encouragement to ais to upgrade their ability to manage these risks appropriately. we knew that for the coming few years ais and their risk management specialists were likely to be preoccupied with pillar 1 and thus we wanted to make sure that these " pillar 2 risks " were adequately addressed as a priority, and not as an afterthought. in theory, pillar 2 requires banks to have a formal process for allocating internal capital against the wide range of risks that are not explicitly part of pillar 1. this formal process is sometimes referred to as the capital allocation assessment process or " caap ". however, it has to be acknowledged that very few banks currently have such a process in place, and only the largest and most sophisticated institutions have been able to devote the resources necessary to building these types of formal capital allocation systems. consequently, as a regulator, we do not plan to require all banks to develop internal capital allocation models, at least initially. the need for such models must be commensurate with each institution's scale and sophistication. in place of requiring all ais to develop these models, the hkma has developed its own internal supervisory review process, or " srp ". as you may know, the hkma has for a long time set capital ratios on a bank - by - bank basis. this has been with the aim of trying to ensure that the capital ratio reflects the risk profile of an individual ai, taking into account the full range of risks to which it is potentially exposed. we intend to use the srp to bring greater rigour into the process of setting ai - specific minimum capital ratios. in effect, the srp is our own credit scoring system.