Finally, the central bank needs to look over the horizon and identify market practices and processes that could make the financial system more vulnerable to shocks or that could  3  2  See “Asset Bubbles and the Implications for Central Bank Policy”, Economic Club of New York, April 7, 2010. BIS central bankers’ speeches  amplify such shocks. As an example, a tougher response to the poor mortgage underwriting practices evident during the U.S. housing bubble would have been appropriate in my opinion. Or more attention to bank compensation practices could have mitigated the incentives for excessive risk-taking. The second implication is that when financial instability does occur, the central bank needs to respond forcefully to mitigate such instability. This includes ensuring that appropriate liquidity backstops are available. This is necessary in order to reassure counterparties that solvent institutions will have access to liquidity so that they can repay their obligations regardless of the degree of illiquidity or stress in the financial system. As we saw in the fall of 2008, without appropriate backstops, markets can seize up completely even when counterparties are perceived as solvent. That is because market participants tend to hoard liquidity during times of stress and because counterparties may not engage with one another when they are uncertain whether others will do so. Central bank liquidity backstops act as a coordinating device, solving the collective action problem faced by private market participants. However, in the most serious stress episodes, credible liquidity backstops alone will not always prove sufficient.

Recent and ongoing efforts have focused on the areas of licensing and capital adequacy. On licensing, there have been two major initiatives: the new Securities and Futures Act (SFA) and the new Financial Advisers Act (FAA). Public consultation documents and draft legislation of the SFA and  BIS Review 63/2001  1  FAA were released in March 2001. The Bills will be tabled in Parliament soon and are expected to be enacted by the end of this year. The SFA rationalises and consolidates into a single comprehensive legislation the Securities Industry Act, Futures Trading Act, and provisions in the Companies Act related to capital raising. It introduces a single, modular licensing regime for securities and futures intermediaries, which will enhance competition and lower compliance costs. The new legislation will also reflect initiatives that take into account industry developments brought on by globalisation and technological advancements. The FAA provides a single licensing regime and a more flexible and integrated regulatory framework for entities engaging in financial advisory activities for all investment products, and facilitates the setting of consistent professional standards across the industry. Similarly, consistent business conduct standards will govern the sale of unit trusts and life insurance across financial institutions licensed by MAS. With the proposed streamlining in licensing, financial institutions and market participants will no longer need different licences to undertake different classes of financial activities. However, they have to abide by common regulatory standards relevant to the financial activity they engage in, including activities where they are exempted from holding licences.