. we should examine carefully the impact of these proposals on two areas, namely trade finance and sme finance. this is of particular significance for emerging economies. • across much of emerging asia, where capital markets are relatively undeveloped, banks are a major source of funding for trade and smes. • trade and smes are major engines of growth in many emerging market economies. let me start with trade financing. • being short - term and self - liquidating in nature, trade financing is probably one of the safer forms of bank lending. • but the proposal to move bank exposures completely to the revised standardised approach could result in imposing significantly higher capital requirements for trade finance, more punitive than justifiable by its historical losses. bis central bankers ’ speeches • while the availability and cost of trade finance have so far held up well in the face of basel iii implementation, the latest set of proposals could have the effect of discouraging banks from trade financing. • this is not what we need at a time when trade is growing more slowly than income in many parts of the world. second, sme financing. • i would say we are broadly on the right track. • while sme loans tend to be riskier on a standalone basis, as a portfolio the risks are more diversified than loans to larger corporates. • the basel committee recognises this and the current capital framework provides for preferential capital treatment for exposures to smes for banks using internal models. • and the basel committee has further proposed applying a lower risk weight for banks ’ sme exposures compared to unrated corporate exposures under the revised standardised approach. this will help alleviate the cost of sme financing. conclusion let me summarise my main points. we have made good progress in bank regulation since the crisis. • implementation has been generally good but some areas need more work and some jurisdictions need to close the gaps. • overall, the reforms have helped to make banks safer and more resilient. as we finalise the basel iii capital reforms, we must ensure that banks are not only safe but also serve their purpose of supporting the economy. • we should be mindful of the effects of low profitability on banks ’ ability and willingness to lend. • we should be mindful not to increase significantly the overall level of capital requirements on banks even as we finetune the detailed capital rules. • and we should be mindful not to unduly penalise lending to important segments of

##ning the basel iii capital rules : • to reduce the variability in risk weighted assets applied by banks ; • to revise the standardised approaches for credit and operational risk ; and • to implement the leverage ratio. bis central bankers ’ speeches but in the course of adjusting the capital rules to better achieve these outcomes, it is important that the overall capital requirements on banks are not significantly increased. there is a real risk that overall capital requirements on banks could indeed increase significantly if we are not careful : • if internal modelling for certain portfolios are completely removed ; and • if risk weights and credit conversion factors under the revised standardised approach are calibrated too conservatively. we need to take a holistic perspective in this final stage of the basel iii capital reforms. • in trying to get the design right, we must not end up making the overall level of capital requirements too high. • in trying to get the micro calibrations right, we must not end up getting the macro settings wrong. we have already achieved more or less the right level of capitalisation for the banking industry through the initial set of basel iii reforms after the financial crisis. if we now precipitate a further increase in the level of capital requirements in the process of adjusting the framework and fine - tuning the calibrations, it would unduly constrain credit intermediation and consequently economic growth. we must guard against these unintended outcomes. it is therefore heartening that the basel committee has committed not to significantly increase overall capital requirements for banks. distribution of credit matters as much as allocation of credit even as we hold the line on aggregate capital levels, we need to be sensitive to the effect of capital requirements on specific business lines and on different economies. • this brings me to the second area that we should be watchful of : namely the distribution of bank credit across the economy as a consequence of regulation. the basel committee will be finalising this year its review of credit risk capital requirements, as it seeks to address excessive variability in risk - weighted assets. • the revisions to the capital standards for credit risk that are currently being proposed will require bank exposures to be risk weighted under a revised standardised approach instead of the internal ratings based approaches. • the return to a standardised approach is motivated in part by limitations in risk modelling, as the last crisis laid bare. however, in avoiding excessive reliance on models, we must be mindful not to “ throw the baby out with the bath water ”