the new accord, but also because this city has one of the highest concentrations of banking institutions in the world, with a strong presence of international banking groups. many people all over the world have been involved in basel ii. but there is no - one more qualified to speak on the subject than our guest today. governor caruana is the current chairman of the basel committee on banking supervision. he is also governor of the banco de espana, and a member of the governing council of the european central bank. governor caruana has extensive experience in both the private and public sector in spain, and is the author of several publications on the spanish financial system. we are greatly honoured that he has accepted our invitation to speak on basel ii today. the basel ii project was already several years old when governor caruana took over its leadership, as chairman of the basel committee, in may 2003. but he has put his own stamp on this project, and has made three special personal contributions. first, he has brought the formulation process to a successful conclusion with the publication last june of the definitive document on the revised framework. producing this necessary road - map was no easy achievement given the differing views that had to be taken into account, and the considerable degree of scepticism in the industry. secondly, he has, through persuasion and advocacy, managed to convert scepticism towards basel ii into a positive and constructive attitude. he has done this in particular by stressing that, when you look beneath the surface, basel ii is not so much about how capital adequacy ratios are calculated, as about how banks can improve their risk management and, thereby, how the efficiency of the banking system can be improved. he has also placed emphasis on the point that basel ii applies not just to advanced banking systems but to banking systems in all stages of development – an observation of particular relevance to this region. thirdly, and of no less importance to us in hong kong, governor caruana has personally supported greater involvement by non - g10 members in the basel ii process. within this region, central bankers have been increasingly active in recent years in trying to ensure that our voice is heard in the process of policy formulation and standard - setting in basel. governor caruana has on a number of occasions spoken out on the need to ensure that our voices are indeed heard, and that our views are actually taken into account. and there are signs that this practice is turning into a tradition : it has

the financial institutions to set deposit rate above the benchmark rate. the previously adopted policy of allowing some rural credit cooperatives to set deposit rate above the benchmark rate had its special background. at that time, postal savings system attracted large amount of deposits from the rural area, but could not use these fund directly to serve the development of agriculture and rural area and the need of farmers. the rural credit cooperatives are in a disadvantageous position in competing for deposits, since the postal savings system not only has its own operational advantages but also enjoy favourable policies. to promote the development of rural financial services, we introduced the policy of allowing the rural credit cooperatives to set their deposit rate above the benchmark rate. now we face some new issues. first, since august 2003, the interest rate policy for the newly increased postal savings deposit has been changed, thus alleviating the problem of rural deposit competition. second, the increase in deposit interest rate has narrowed the interest spread, resulting in difficult financial situation of some of the rural credit cooperatives. third, some county - level financial institutions that were not given the flexibility to set their deposit rate above benchmark rate complained that they were facing unfair competition from the rural credit cooperatives. therefore, the policy of allowing the deposit interest rate to move upward against the benchmark rate need to be carefully examined and evaluated. in china, almost no financial institutions offer below - benchmark interest rate on deposits. while in other countries, many banks set their deposit rate below the central bank ’ s benchmark rate. one of the main reasons is that financial regulation in china has not strictly enforce the requirement in basle committee ’ s capital accord, and the excessive expansion of the balance sheet of the deposit - taking institutions has not been effectively contained. china banking regulatory commission is going to introduce stricter capital adequacy requirement. after such requirement is imposed, the banks that have inadequate capital and have difficulties in strengthening their capital base must reduce the growth of their risk assets. without effectively lowering the risk weight of the assets, they will have to tighten their balance sheets. so they may offer lower interest rate on the deposits. third, further relaxing the regulation on interest rates. we need to consider whether it is necessary to regulate some interest rates or to set narrow floating bands on these interest rates. iii. gradually establishing effective benchmark yield curve market - based interest rate reform will contribute importantly to the formation of effective benchmark yield curve. at present, there are insufficient