MAS is involved in discussions at the Financial Stability Board, the Basel Committee on Banking Supervision and other fora to consider proposals to strengthen the regulatory framework. Let me highlight two key areas of focus: regulatory capital framework and liquidity risk management standards. The crisis occurred on the back of aggressive risk taking and leveraging. Risks had been under-estimated and in many cases, financial institutions were over-reliant on external credit ratings and on quantitative models. Risks were built up both on and off the balance sheets of banks. When these started to materialise, the de-leveraging effects and the steep fall in asset prices resulted in liquidity seizures in asset and funding markets. This caused major losses and writedowns of bank capital. In many cases, costly government intervention was needed to keep the financial institutions from failing. To improve the resilience of banks, global regulators have agreed to raise the levels and quality of bank capital. Additional capital for trading book and for securitisation risks will be needed. There are on-going discussions on establishing a framework for countercyclical capital buffers and raising the quality, consistency and transparency of the Tier 1 Capital base. Other supplementary tools to contain the riskiness of banks, such as a leverage ratio are also being developed. To address liquidity concerns, regulators are considering the introduction of a minimum global liquidity standard that includes a stressed liquidity coverage requirement underpinned by a longer term structural liquidity ratio.

MAS will, as part of its supervisory review process, continue to engage the banks on their capital planning processes, and to evaluate whether the framework is sufficiently robust and comprehensive. The third area that financial institutions need to do is to establish firm-wide risk management and foster an appropriate risk management culture. In this crisis, several institutions that failed were managing risks within “silos”, by organisational structure or by risk types. In terms of culture, the focus on expanding earnings needs to be matched with an equal focus on risk and control. Senior management and staff at the business lines need to comprehend, and be accountable, for the risks which emanate from their activities. Risk managers have to be empowered to call a stop to the dance even while the music is still playing. It is in this context that the recent Financial Stability Board principles on compensation have been formulated, to align compensation to prudent risk taking. So far, I have highlighted some of the challenges facing regulators and industry participants. Academics, researchers and institutes such as RMI, play important roles in supporting the financial industry in its journey to improve risk management practices. Let me now touch on the role that RMI can play. RMI’s role in the aftermath of the crisis As a knowledge centre in financial risk management, RMI acts as the link between theory and application, bringing together researchers, risk managers and regulators to share experiences and views on risk management. I believe RMI can do more to facilitate this.