system, and strong governance. asia ’ s simpler banking model, and reforms to strengthen bank risk management and risk - based supervision, help to foster a strong first line of defense. but as i mentioned earlier, we would risk false sense of security if we believe we can depend just on our simpler banking model. with economic and financial liberalization, especially propelled by the regional economic integration such as asean economic community or aec, that simpler banking model is changing. i will return to this issue later. for now, let me return to basel iii and the potential side - effects for asia? there are some concerns about unintended consequences from basel iii that bankers and regulators in asia have voiced to the standard setters. i will, at this time, not comment on those issues which are not concluded such as liquidity rule. one of the most important and immediate consequences would be impact on trade finance which is a critical issue for emerging economies and asia. this is because our economies and financial structure is more dependent on it, compared to some western economies. let me elaborate. international trade is a major driver of gdp as our export is part of the global and increasingly integrated regional supply chain. however, many of our exporters are smes not large conglomerate. these local smes rely on bank financing, as our financial system remains more bank - based than market - based. supplier of trade financing is still banks in western countries, especially european banks. the deleveraging of european banks can reduce the supply of trade financing and impact growth and development. to address this, it is important that basel committee recognizes that trade financing has relatively large impact on asia, compared to the western economies for which basel iii is mainly geared. treatment of trade financing in leverage ratio framework will create incentive for banks to shift away from trade financing towards other types of financial transactions, including derivatives which have lower impact on leverage ratio, but can earn higher return. this is because they are assigned lower credit conversion factor even though trade financing is less complex, more familiar, has low liquidity risk as they are self - liquidating, and most importantly, it clearly serves real sector. we believe these rationales argue for a more appropriate treatment of trade financing to ensure that the basel iii framework is appropriate for asia. the current effort of fsb to survey unintended consequences of reforms on emerging market is welcomed. bis central bankers ’ speeches before ending this note on basel iii, let me touch on thailand ’ s own take on these

restrictions on cross - state bank branching and ownership, which points in the same direction. these two aspects – monetary policy transmission and promoting citizen welfare - explain the efforts that central banks have made to contribute to the integration process, although the leading roles and initiatives rightly correspond to the european commission and to market forces. maybe the most telling example of the central bank contribution is the establishment of target, promoted by the eurosystem and introduced at the beginning of stage three with the aim of integrating the system of large value payments across the euro area. it is widely recognised that its success has played a crucial role in the integration of interbank markets in europe. however, the mandates of most central banks, including indeed both the eurosystem and the banco de espana, also cover other objectives. there is, in particular, an area which deserves special attention in this context. i am referring, of course, to the function of promoting financial stability. it is precisely in this area where the impact of financial integration is less clear. does financial integration promote financial stability? or does financial integration put financial stability in danger? as a matter of fact, while the effects of higher integration on per - capita income and on the efficiency of monetary policy transmission have received a lot of attention by researchers, the impact of financial integration on financial stability is under - researched. that is why we are holding this conference. despite the lack of research, it seems clear that there are some areas where financial integration favours financial stability. firstly, a more integrated financial system enlarges the opportunities available to investors, lenders and borrowers to diversify the different risks associated with their financial decisions. through such diversification, they should become less exposed to idiosyncratic shocks, asset prices and financial flows should behave in a smoother way and as a result, the risk of financial distress should be reduced. secondly, in a more integrated system, financial intermediaries would find it easier to grow and at the same time would find the incentive to do so in the enlargement of their potential markets. larger institutions would therefore be in a better position to reap the benefits of greater economies of scale, and would also increase their financial muscle to withstand potential shocks. unfortunately, however, there are no free lunches in the economy and it seems that financial integration can also have negative effects on financial stability. therefore, fully integrated financial markets pave the way for shocks to propagate more quickly among market participants, thereby affecting a