By encouraging a dialogue between bankers and supervisors through Pillar 2, the Committee believes that the New Accord will create additional and powerful incentives for banks to exercise care in their internal assessments. But equally important, by agreeing on shared guidelines for supervisory review, we expect that the New Accord will promote greater consistency in the manner in which supervisors apply the capital framework. When supervisors across jurisdictions share similar expectations for capital adequacy, the regulatory burden on banks operating in different jurisdictions can be eased greatly. The third pillar - market discipline - seeks to leverage the influence that other marketplace participants can bring to bear on a bank to manage its risks appropriately. By enhancing transparency in a bank’s public reporting, counterparties, rating agencies, and even customers will have better access to timely  2  BIS Review 12/2004  and meaningful information about a bank’s activities and exposures. They will, in turn, be better able to make business or investment decisions. That will help markets to reward banks that manage their risks judiciously while penalising those that do not. By matching the minimum capital requirements with a robust supervisory review and enhanced financial transparency, the Committee is embracing a philosophy of incentive-based supervision that will encourage banks and supervisors to focus on the quality of their risk management processes. So the basic three-pillar structure of the New Accord is rather simple to explain. The challenge lies in specifying principles and rules for banks and markets of many sizes and shapes.

Foreign exchange intervention is carried out in support of the monetary policy objective of price stability and not for any macro-financial purposes. There is no explicit inflation target but the track record of keeping core inflation relatively stable and, on average, just below 2% over the last thirty years has underpinned the MAS’ policy credibility. Fiscal policy seeks to promote macroeconomic stability, sustained economic growth, and social equity while maintaining a balanced budget. It is set by the Ministry of Finance (MOF). The Constitution prohibits the use of public debt for government expenditure except for a narrow class of long-term infrastructure projects. Macro-financial policy comprises essentially of macroprudential measures aimed at promoting a sustainable property market. These measures are co-ordinated across the MAS, MOF, and Ministry of National Development (MND). The macroprudential toolkit comprises loan-to-value limits, debt servicing limits, buyers’ and sellers’ stamp duties, and adjustments in land supply. In the movie “Everything, Everywhere, All at Once”, we are told that parallel universes exist because every life choice creates a new alternative universe. Thankfully, the global economy and financial system are not as complicated as the multiverse. But the real economy and the financial economy are like parallel universes with many transmission channels across these two universes that we are only beginning to understand. Achieving coherence across policies through an integrated framework is key to minimising the risk of repeated bouts of financial and economic crises feeding on each other. It is not easy but probably not as difficult as jumping across the multiverse.