minimum standard. some banks, including a few here in hong kong, have argued that the late adoption of basel iii by some advanced economies creates or constitutes an uneven playing field, placing them in a competitively disadvantaged position. it will be even worse, according to the banks advocating this level playing argument, if their national supervisor imposes capital or liquidity requirements that exceed the international standards. 14. pillar 2 of the basel accord was of course introduced, at least in part, to do just this by enabling supervisors to make adjustments in minimum required levels of capital to reflect individual bank risk profiles, but even here we are met with “ level playing field ” arguments – complaints that other jurisdictions don ’ t use pillar 2 to the same extent – or at all – and so we should not use pillar 2 aggressively or else we will “ damage ” or “ ham - string ” our banks. but if this is the case, then if all banks seek to maximise their profits, by pushing down or “ optimising ” their capital and liquidity levels and taking on more risk – focused on the basel standard as the ultimate benchmark – then do we not risk the standard actually encouraging a “ race to the bottom ”? is it a race that may lead to higher profits or roe for banks and their shareholders only in the short term? is it a race that could create, in the longer term, serious problems for the safety and soundness of the banks concerned and financial vulnerabilities for society as a whole? 15. i don ’ t profess to know all the answers to the questions i have just raised. no matter what, there is a clear and indisputable need to enhance the resilience and robustness of the global financial system. the basel committee has done a great deal in upgrading capital and liquidity rules. under the direction of g20, there is long list of other regulatory reforms, including those dealing with the moral hazard problem arising from “ too big to fail ” and the risks observed in the otc derivative markets. some national authorities have introduced, or plan to introduce, measures that would separate core retail and commercial banking from bis central bankers ’ speeches investment banking. although, as i have said, very few people would dispute the need for urgent reforms, there are differences in views on whether the reforms that are underway are indeed adequate or entirely appropriate. 16. i hope that, at tomorrow ’ s forum, you will have the opportunity to discuss these and other

in upgrading global standards on the quality and quantity of the capital, and introducing global standards on the liquidity that banks have to hold in order to improve their resilience to risks and shocks. some countries have already implemented these standards but some advanced economies have not yet done so. does this create an unlevel playing field that might compromise fair competition as well as the soundness of the banking system? need to rethink the nature and management of financial risks? 5. mainstream thinking in recent years has been to see risk in terms of probabilities of events that can be quantitatively expressed and forecast with statistical models. however, if we did not know before we certainly know now, that some of these models make strong assumptions, such as “ normally distributed returns ” or other not sufficiently fat - tailed bis central bankers ’ speeches distribution assumptions, which are usually not supported by empirical evidence. these quantitative models underestimate the likelihood of the “ tail events ” and the amount of losses that would occur in such events. as we now know, the highly improbable event, or the “ tail risk ”, has occurred all too frequently and with highly disruptive, if not devastating, impact on financial as well as macroeconomic stability. 6. this has been on the cards for a while. according to the account by roger lowenstein in his book “ when genius failed ”, the ill - fated long term capital management, ltcm, in one of its investor newsletters back in 1994, suggested that its var analysis showed that, “ only one year in fifty should it lose at least 20 % of its portfolio. ” ltcm also calculated that losing all of its capital within one year was a 10 - standard - deviation event. this suggests that the probability of such an event occurring would be no more than once in 300 years under even the very conservative assumptions. but the event had occurred within five years of ltcm ’ s birth. 7. it is natural, and indeed probably inevitable, that, in seeking to predict the probability of an event occurring, we tend to look to past experience. however, as we all dutifully warn investors when selling investment products, “ past performance is no guarantee of future performance ” and so we must stand ready to admit that there are fundamental limitations in our existing risk management tools. that is, the predictive powers of models are inherently restricted by historical experience. where we encounter something new, such as innovative products or business model changes resulting in