investor and other stakeholder initiatives. judging from this evidence, while the response of financial institutions is positive, it is still very much in an early stage. and in the case of asia, the progress is even more limited. the main supplier of carbon credits in cdm is china, while the rest of asia lags behind. in asia, the engagement of financial institutions on climate change is scattered and not yet a momentum. the progress is hampered partly by inadequate supporting framework that includes lack of clear policy and incentive as well as information. let me now discuss some of the current problems in asia and the prospects for the financial system in emerging markets, especially in asia, to become more engaged with the issue. given limited progress so far, the challenge is how to engage the financial system in emerging markets more extensively on climate change. in moving this issue forward, a critical role has to be played by policy, especially on the role of incentive and the development of tools that can facilitate the response to climate change. on incentive, a good starting point is to discuss the principles that would be important in guiding the design of policy, which in my view, four key principles stand out. first, the role of the states and policy are critical to ensure that the global rule of the market is clear and continuous beyond 2012. this is because any uncertainty about the global rule will only discourage future efforts and derail the momentum of the current efforts. second, policy at the country level should focus on providing market infrastructure that assists adaptation and mitigation i. e. legal, tax, regulatory framework, accounting, and information. but more importantly, correct incentive structure has to be put in place to internalize benefits from clean technology. third, under the incentive structure provided, given many uncertainties surrounding climate change, it is important that the strategy to promote increased engagement relies on market mechanism to build growth and innovation. this is because the market would be in a better position to assess and price risk - return tradeoffs more efficiently. and fourth, financial regulation should be neutral on the issue, focusing instead on risk management capability of financial institutions, especially the ability to handle new risk and new innovation, with a view of maintaining soundness and stability of the overall financial system. under these key principles, the actual design of incentive for specific economy would vary, taking account of country ’ s specific circumstances such as the state of economic development, the level of financial deepening, and the strength of its policy institution. turning now to

. in particular, basel iii calls for more and better capital of financial institutions and also introduces leverage ratios and stresses the role of liquidity risk. – second, they also include macro - prudential regulations, aiming to mitigate systemic risks across the banking system. better and more capital buffers are supposed to make the banking sector more resilient in the case of another crisis. the increased capital requirement may come at high cost, though. if banks hold too little capital, they are left crisis - prone and in the potential need of bail - outs. too much capital, however, could lead to huge swathes of the banking business becoming unprofitable. this might cause higher borrowing cost which could affect economic growth negatively. by consequence, riskier assets but more profitable activities might be driven into the shadow - banking sector. but the regulation of the shadow banking system is still an unsolved issue. these entities are no banks in the legal sense, although they take – and generate – similar risks. if there is a strict silo - regulation of the formal banking sector, the actual risky business does not disappear, but moves on in the non - regulated sector. an important issue is the problems of banks that have become too big or too interconnected to fail. the idea that a “ systemically important financial institution ”, sifi, will be saved in a crisis because of its systemic importance is not compatible with the core principles of a market economy. those who fail in the market have to bear the ultimate consequence of leaving the market. but if the maxim is “ too big to fail ”, then the state and the taxpayers are vulnerable to blackmail. compare kern, steffen : global financial centres after the crisis, db research, august 2010. bis central bankers ’ speeches the financial crisis has exacerbated the problem in so far as some of the surviving banks have become even bigger or more interconnected. moreover, the government guarantees which were appropriate in the crisis now encourage banks to grow, to connect and to take even bigger risks. to repair this clearly flawed incentive structure, the g20 endorsed the financial stability board ’ s ( fsb ) policy framework to address the moral hazard risks and externalities posed by sifis. the key policy objectives of the fsb sifi framework are to ( i ) increase their loss absorption capacity to reduce the likelihood of their failure, ( ii ) to facilitate the orderly restructuring or unwinding of a failing sifi to reduce the