Technology and competition are transforming the way in which financial services are produced and distributed, and driving the convergence of financial products and service providers. The traditional divides between banks, securities firms, and insurers are blurring. Securities firms are offering deposit-like products; banks are selling insurance under the rubric of ”bancassurance”; and insurance companies are offering investment-linked products as substitutes for unit trusts. As Mr Andrew Crockett, General Manager of the BIS, said recently, the challenge for regulators will be to 2 ”create rules of the game that are robust to fad, fashions and arbitrage” . How should MAS respond? How should MAS respond to these challenges? Our objective remains to promote a sound and progressive financial sector. Our approach to rule-setting must adapt to new developments, be sensitive to the effects of regulation on industry, and be focussed in identifying and addressing risks. We have already broadened the limits within which institutions have free play. We must now aim to develop a pro-enterprise supervisory framework that will encourage innovation and dynamism without compromising the safety and soundness of the financial system. Such a framework will comprise the following elements: ·  risk-focussed, consolidated supervision;  ·  harmonised regulation;  ·  sound corporate governance; and  ·  effective market discipline. Let me elaborate on these elements of the new framework. Risk-focussed, consolidated supervision We are adopting a risk-focussed, consolidated approach to the supervision of financial institutions. We will place more emphasis on understanding and evaluating an institution’s risk management systems and internal controls.

The Bank’s Decision Maker Panel (DMP) survey tells us that corporates above the 90th percentile of indebtedness are expecting to reduce their investment by almost 5 percentage points more over the course of this year in response to higher interest rates than firms below it. If firms cut back investment excessively, or if productive firms forego investment opportunities, the  Page 7  effects could be persistent. I’ll talk more about this later when I turn to our secondary objective, but it should be clear that scarring of this kind can affect long-run growth. How resilient is the supply of finance to UK corporates? The future resilience of lenders and borrowers will reflect not only macroeconomic developments and idiosyncratic business factors, but corporates’ ability to access funding too. Sudden or unanticipated disruptions to the supply of credit could amplify stress, particularly for highly indebted companies  , or companies reliant on short-term debt  . Research shows that the credit crunch following the GFC caused direct damage to companies and the real economy over and above the effects of a normal downturn. Back then, banks with weaker capital ratios and those more exposed to the US mortgage market constrained lending activity by more than other lenders as they focused on rebuilding their own balance sheets. This had wide-ranging consequences: as I’ve mentioned before, those directly affected by this credit crunch cut their investment more than unaffected companies. These same companies also experienced weaker productivity growth and were more likely to fail  .