Transcript of Question & Answer Session Address to the Boao Forum for Asia Financial Cooperation Conference


I want to now go to Glenn Stevens and one issue that really occurs to me at least anyway in regards to all of this is that, even though since 2008 capital standards have been improved, regulation has been changed and adjusted to try and prevent the type of contagion that occurred as a result of the banking crisis that began in the United States, is it not true that even all of the standards that have been applied and built in you'll never genuinely know as to whether they are successful despite all of the modelling that might be done until they are put under the ultimate stress test? In other words, if there is another crisis somewhere to work out whether the regulation has genuinely worked or not?

Mr Stevens

Well I suppose that's true Ross in the ultimate analysis. We're in the process and this is actually still very much a work in process – progress and it's far from finished yet actually. The full implementation of Basel III and all the associated things isn't really complete for some more years yet, so we're on a journey. And if, God forbid, there's another crisis, you're right, we'll find out at that point whether what we're doing is fully effective or not, but you know what other choice do we have? We've had a bad experience, we've seen some clear weaknesses in the preceding set of arrangements as Pascal and others have been saying and something has to be done to fix that up. And in the main I don't think there is much doubt that more capital, higher quality capital, more attention to liquidity risk, doing things that make the plumbing of the financial system work more safely, and this is in the derivatives space, it's very unlikely that those things are actually going to be harmful or completely ineffective in ameliorating the risk.

Are they enough? Well as you say we can't be completely sure but you never can be completely sure with these things in real life and I would argue that if you went to the point where capital standards and so on were so strict that it was 100 per cent certain there'd never be another problem, you've probably actually gone too far, actually. There is inherently some risk and uncertainty in life, we have to accept that, but it's a matter of balancing you know how much tail risk we're prepared to leave in the system and what the cost is of taking some of that tail risk out. That's the balance that has to be struck by the international regulatory community and as I say it's a work in progress.


We've got multilateral agreements taking place, potentially bilateral agreements taking place, we've got a spirit of financial co-operation taking place. Throw your mind out as far as you like, 10 years, 15 years, 25 years, 35, go as far as you like [on the question of a potential Asian currency union].

Mr Stevens

Well you've got to remember Ross that the euro was actually the end of a 50-year project, so 35's probably not a long enough horizon here. But I think it's unlikely. It's being talked about less today, a single currency in Asia, than it was 15 years ago. That's probably partly because of some of the difficulties the euro has encountered, but I think it's also because of the points that previous speakers have made. The big gains are probably freer trade, soundly based free capital movements, the sense of a – more of a regionally integrated capital market. They're actually where the big gains probably are and the single currency, I suspect, if that ever came, is a rather smaller gain than all of those things which are pre-conditioned for it anyway. So my answer is I think it's unlikely.