In this age of increased connectivity and correlation of markets, respondents felt that a shock event such as a terrorist attack, pandemic or geopolitical instability could cause market disruptions. Respondents also highlighted the current liquidity in the financial markets. They observed that speculative liquidity was circulating in the financial system. This has led to historically unprecedented pricing and terms. When referring to the new players in the financial markets, respondents spoke of hedge funds and private equity in the same breath as “highly leveraged”, “covenant-lite structures” and “large speculative positions”. In the current low interest rate environment, many yield-hungry investors have become hedge providers for institutions. Respondents expressed concern about the systemic risks such providers posed and their default risk in a severe market correction. In summary, the responses to the survey indicated that there seems to be a heightened level of risk in the macroeconomic and financial environment. Nevertheless, these responses are encouraging from another perspective. They indicate that financial institutions are aware of this heightened level of risk. With acceptance comes preparedness for the risks that may materialize in future. It is important for banks not to become complacent. As banks pursue the many opportunities that lie ahead, we must not let our guard down. Banks must not be lulled into a false sense of security by the external environment’s bullishness and resilience to shocks so far. We must not allow ourselves to get over-confident with our knowledge and analyses of the risks out there. Risks may deviate from expectations.

To complicate matters, we must not forget the geopolitical risks in the Middle East, terrorism and other surprises. This year, we have already had several reminders of the risks in the system. The Chinese stock market has experienced a few incidents of volatility following expectations of and actual government action. It remains vulnerable to further corrections. In the US, the sub-prime market has imploded. More recently, US treasuries have come under severe selling pressure, causing interest rates to rise and generating unease in stock markets. Nevertheless, the financial system has been resilient so far. Have we learnt our lessons from past crises and are now better prepared? Or are we just plain lucky? Whichever the answer, we should remain vigilant. As bankers, you will be familiar with the saying that bad loans are made in good times. This saying is particularly worth repeating when the environment appears rosy and serves as a reminder that vigilance is our constant responsibility. With this in mind, MAS initiated a survey of risk managers and traders, many of whom are based in Singapore, about their key risk concerns. This poll was conducted between April and June this year. A roundtable discussion was also held with risk managers. Let me now share with you some of the findings from this survey. The feedback received was open and honest and many views were shared. Most respondents believed that asset prices were frothy and that a big shock could happen. Some speculated that this could happen before the end of 2008.