Heng Swee Keat: Dealing with the implications of the crisis and implementing policy reforms Keynote address by Mr Heng Swee Keat, Managing Director of the Monetary Authority of Singapore, at the Opening of EDHEC-Risk Institute, Asia, Singapore, 21 January 2011. *  *  *  His Excellency Olivier Caron Ambassador of France to Singapore Mr Richard Simonin Chairman, EDHEC International Advisory Board Mr Olivier Oger Dean, EDHEC Business School Professor Noel Amenc Director, EDHEC-Risk Institute Associate Professor Frederic Ducoulombier Director, EDHEC-Risk Institute, Asia Ladies and gentlemen Introduction 1. Good morning. I am very pleased to join you today at the grand opening of EDHECRisk Institute’s Asian centre in Singapore. Key observations from the crisis 2. The financial crisis has fundamentally changed the way we perceive and manage risks and uncertainty. Assumptions and models that had been taken for granted are being challenged, and new developments are changing the risk landscape. Let me share three observations about risks. 3. First, the growing complexity and interconnectedness within the financial system, and between the financial and economic systems have multiplied risks significantly. There are now many more potential sources of failures and the transmission of shocks from one market to another have become faster and more unpredictable. 4. Prior to the crisis, financial and capital intermediation had increasingly shifted to relatively unregulated non-bank financial institutions. Complex securitisation structures and off-balance vehicles that were thought to disperse risks led instead to concentration of risks and excessive leverage.

The crisis highlighted the complex webs of inter-linkages between financial institutions, financial instruments and financial markets. As liquidity and confidence evaporated and the financial accelerator kicked in, credit markets and financial institutions experienced severe stresses. This in turn dragged down the real economy, and world trade collapsed. With globalisation, even though financial markets in emerging markets did not suffer the same problems, the collapse of trade and investors’ confidence, exacerbated by credit cutbacks, brought most developed and developing countries across the world into a deep and synchronous recession. 5. My second observation is that we should not underestimate how fast risks can build up. In the years leading up to the crisis, many new financial products developed and grew very swiftly. Credit default swaps for example, grew from just $ billion in 2001 to more  BIS central bankers’ speeches  1  than $ trillion within 8 years. In 2004, outstanding mortgages held in non-agency MBS in the US were just $ billion. It tripled to over $ trillion within 2 years. It is a similar story with the origination of subprime mortgages. In the same period, global CDO issuance more than tripled from $ billion to about $ billion. These assets were held in banks and non-banks globally. When the financial crisis struck, the world was shocked not only by its severity, but also by the speed in the transmission of shocks throughout financial markets. There is no better illustration of how new sources of systemic risk can build up rapidly. 6.