The second curve in the figure represents variations in the amount of credit or degree of indebtedness in the economy. There are slightly different terms for these cycles in academic literature – credit cycles, leverage cycles or financial cycles. 3 They can have slightly different meanings in different contents, but essentially refer to the same thing. For the sake of simplicity, I shall use the term credit cycles here. The credit cycle and the business cycle may occasionally coincide quite well, but can at times develop differently. In the figure, the two cycles are for illustrative purposes assumed to evolve rather differently. One occasion when the two cycles coincide, however, is when the credit cycle shows a rapid downturn, as at the end of the figure. Such a downturn is more likely when the preceding upturn has been unusually strong and characterised by exaggerated optimism and risk has been underestimated and under-priced. Credit boom that “goes wrong” – credit and business cycles coincide At some stage it becomes clear that the large amount of credit and the high level of indebtedness are based on overly optimistic calculations. Interest in selling the asset, usually housing, at the base of the credit expansion suddenly becomes greater than interest in buying it and a downward price spiral starts. The value of the collateral falls and the banks become cautious and reduce their lending. Households on the other hand see the value of their assets plummeting while the size of their loans remains unchanged.

It includes a suite of tools ranging from prudential instruments like loan-tovalue ratios and fiscal measures like stamp duties on property transactions, to supply-side and other administrative measures. Singapore does not target asset prices but keeps a close watch on asset price movements, looking for signs of speculative froth, excessive leverage, or concentration risks. 19. Systemic stability is also a shared responsibility. It requires coordinated efforts across different government regulators and agencies. MAS is fortunate in this regard. As an integrated regulator which supervises the banking and insurance industries, as well as the capital markets, MAS is well placed to take a comprehensive view of risks within the financial system as a whole. As a central bank responsible for macroeconomic stability, MAS is also able to monitor and understand the effects of monetary and liquidity conditions on systemic risks. And MAS works closely with other government entities on issues such as system-wide safety nets – such as the deposit guarantees of 2009 and 2010 – taking a comprehensive whole-of-government approach. Reconciling international standards and domestic discretion 20. The third dimension of rebalancing in regulatory reforms is that between international standards and domestic discretion. We have known for some time that we live in a globalised, interconnected world. But we did not know the extent of our interconnectedness until the crisis hit home. Cross-border bank lending is more than 40 per cent of world GDP. Global finance is really a vast and complex network of connections. Financial shocks are transmitted through this network with speed and virulence.