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.

bud when people speak up and senior management responds appropriately. therefore, bank leaders ought to recognize and reward those who speak up. actions speak louder than words in shaping culture. establishing appropriate incentives and fostering an environment in which people feel they can speak up would go a long way toward bolstering bank culture. i am gratified that many bank leaders and boards of directors are working hard to improve their firms ’ cultures, and i very much appreciate the g30 ’ s efforts in this area. i think most leaders recognize that good culture is fully consistent with strong financial performance, and that it helps enable banks to attract the talent needed to sustain such performance. yet, we could make greater progress more quickly if this effort were coordinated across the industry. i think bank leaders could benefit from sharing best practices and participating in surveys that would allow them to benchmark their strengths and weaknesses versus others on an ongoing basis. building a financial system that is more resilient and robust, having a bank resolution regime that credibly ends “ too big to fail, ” and building strong cultures that restore the trustworthiness of the financial industry are all goals we must continue to pursue. without success on all three fronts, i don ’ t think we can say that we have fully addressed the problems made evident by the financial crisis. thank you for your kind attention. 3 / 3 bis central bankers'speeches