between savers and investors, or if it leads to cross - jurisdiction establishment of subsidiaries and branches, the nature of credit risks facing financial institutions may also change. exposures to different business cycles will increase as will exposures to different sources of idiosyncratic risk. supervisory agencies need to make sure that appropriate risk control measures are implemented in individual institutions, and that their capital adequately reflects the market, credit and operational risks they are exposed to as they enter foreign markets. 22. here in hong kong we are well on our way to implementing the latest international standards in this respect, i. e. the basel ii standards. as the bank supervisor, the hong kong monetary authority has been working with banks and legislators to ensure that we are able to implement the new standards by 1 january, 2007. we have also been working with other regulators in the region through the emeap working group on banking supervision to share our experiences on the implementation process. 23. ladies and gentlemen, i have given you a brief personal perspective on financial integration and regulation in our region. i do not know whether i have convinced you of the importance of these topics for our continued economic prosperity and financial stability. but i certainly hope to have persuaded you that they are topics that deserve our attention whether we are policy makers, regulators of the financial system, or members of the private - sector financial community. i am sure that more will be said about these topics throughout the conference, and i look forward to hearing from our european colleagues about the experience in europe concerning financial integration and regulation in the euro area.

for short - term gains. there is also the temptation, for some, to engage in manipulative behaviour, amplifying volatility and vulnerability to financial instability. 13. i do not want to give the impression that the size of a financial market can substitute for sound macroeconomic policies as a guard against volatile capital flows. indeed, i take it for granted that the authorities in the region are committed to prudent monetary, exchange - rate, and fiscal policies. but i am convinced that expanding the effective size of asian financial markets through greater integration across jurisdictions, can increase the ability of our economies to absorb the volatility of international capital, as effectively as the us and european markets. it is therefore heartening to observe that several official initiatives towards greater financial linkages in the region are bearing fruit, notably the chiang mai and the asian bond fund initiatives. i note that my colleague julia leung will describe the latter in some detail in the afternoon session. 14. having made the economic case for increased financial integration allow me to spend a few moments outlining some practical steps that may be taken to achieve it. first, it is necessary to establish linkages between jurisdictions across the whole spectrum of financial infrastructure – the trading, payment, clearing, settlement and custodian systems for money and for financial instruments. this would facilitate the movement of savings between jurisdictions and make cross - border transactions more efficient. in this age these linkages are neither difficult nor costly to establish as the technology, in the form of electronic messaging platforms of acceptable security, is already available and in international use. 15. the second element concerns the relaxation of non - supervisory restrictions, where they exist, against access by foreign financial intermediaries to the domestic financial markets. the size of financial intermediaries, measured for example in terms of capital, is often a barrier to market access ; but, as we know, size is not necessarily a good indicator of quality. capital adequacy, assessed objectively by reference to risk, provides a better safeguard. greater competition, wherever it comes from, also enhances efficiency, although allowances should be made for the weaker domestic institutions to enable them to cope and find viable long - term solutions, in the interest of financial stability. 16. the third element concerns the harmonisation of standards in the financial system. a degree of harmonisation, at least the adoption of minimum acceptable international standards, is essential for improving investor confidence and enriching the flow of capital within