. beyond this cyclical issue, china is set to continue growing strongly for the next decade or two. the other asian giant, india, is becoming a dynamic and prosperous economy. liberalisation policies and market reforms are freeing up the long moribund indian economy. state - owned enterprises are being privatised. ports, airports, telecommunications and financial services have been opened up to competition and foreign participation. as the dead hand of bureaucracy is withdrawn, growth is taking off, especially in the services sector. with well - trained, english speaking, and cost - competitive professionals, india has created a niche for itself as the world ’ s back - office as well as a global software centre. the bjp coalition ’ s unexpected defeat in the general elections reflects the unhappiness of rural voters who have not benefited from the liberalisation. this may cause the new congress government to be more circumspect about pressing ahead with reforms, although optimistic commentators argue that the voters are pressing for faster reforms rather than slower. whether or not that is so, the policy of liberalisation commands bipartisan support, and is likely to continue. after all, the new prime minister, dr manmohan singh, was the architect of the initial economic reforms in the early 1990s. he has appointed as finance minister mr chidambaram, who is also a reformist and a former commerce minister and finance minister. i am therefore hopeful that the thrust of liberalisation will continue, and india will play increasingly a prominent role like china ’ s in the regional and global economies. closer to home, the prospects for southeast asian economies are also looking better. the region initially struggled as political and security concerns deterred foreign investments and distracted governments from tackling serious economic problems. but southeast asia has stabilised considerably in recent years. governments are responding more vigorously to the threat of terrorism and restoring order and confidence. the political upheavals that swept across the region have also subsided, allowing governments to focus their attention on fostering growth and development. the thai economy has done particularly well. for the past few years it has been the fastest growing economy in southeast asia. through a series of bold initiatives, the thai government has revived the rural economy, stimulated domestic demand, and repaid its imf loans. this has bolstered confidence and got business moving again. indonesia ’ s economy has improved significantly despite a complex political situation. reforms were slow initially, as corruption and an unreliable legal system impeded progress. nevertheless,

‘ capital ’ is the portion of a bank ’ s funding that can absorb losses ahead of creditors, allowing the bank to continue operating as a going concern or reduce losses to creditors and depositors in the event of failure. a key word in this principle is readily. to be useful in supporting a distressed bank, capital instruments must be able to absorb losses as and when they arise. capital instruments can be ranked based on their subordination, permanence and loss absorbency, with common equity tier 1 ( cet1 ) capital being the highest quality capital instrument. the reserve bank will consider the roles of the different tiers of capital and whether more emphasis should be placed on simpler and higher quality forms of capital. we are particularly interested in reviewing the role of convertible capital instruments and will give this some priority in the review. 5 / 9 bis central bankers'speeches the principle of loss absorbency is also relevant for our assessment of buffers that are required in addition to minimum capital ratios. the current regime includes a conservation buffer of 2. 5 % and the potential for a counter - cyclical capital buffer under our macro - prudential framework. such buffers enhance the ability of banks to readily absorb losses while remaining compliant with minimum ratios. an appropriate structure for capital buffers will be an important issue for the review. 2. capital requirements should be set in relation to the risk of bank exposures regulatory capital requirements must reflect the underlying risk of exposures in order to avoid distorting banks ’ risk - return decisions. critics of the basel framework maintain that ever - increasing risk granularity has led to a spurious sense of sophistication and that the pendulum should swing back to simpler, more objective measures of risk. 14 in particular, the use of internal models to determine capital requirements has been shown in practice to lead to excessively wide estimates of risk for what is the same underlying exposure. 15 the basel committee has agreed that a simplification of the framework and a reduction in model - based variation in capital requirements is desirable. however, as noted, we are yet to see the final shape of these reforms. we believe that model - based variations in risk measurement are less pronounced in new zealand, due in part to our restrictions on internal model parameters and our relatively simple approach to market risk measurement. however, we agree that excessive complexity is undesirable and that risk differentiation should only occur when it is based on objective and credible measurement. in the review, we