2  BIS Review 60/2008  Climate change and environmental sustainability Another longer term issue that the world has to deal with is climate change. This is a topic of increasing importance and it is timely that Merrill Lynch has introduced the environmental theme in this year’s conference. Many countries have come to realize that economic development without taking into account the environmental cost presents a classic case of the Tragedy of the Commons. Problems caused by climate change and global warming affect all of us. As a country lacking in natural resources, Singapore sees a critical need to promote sustainable development. Singapore’s National Research Foundation has dedicated significant resources to facilitate research efforts and encourage commercial spin-offs. R&D initiatives have been complemented by both domestic and foreign investment in the areas of sustainable water and solar energy projects. Some of you would have read about Renewable Energy Corp from Norway, which is building a Euro 3 billion plant in Singapore for the manufacturing of solar modules. By 2010, NEWater, our very own water recycling industry, will be able to meet 30% of Singapore’s water demand. Singapore has also adopted a model to promote sustainable urban design for housing development, environmental management and transportation. For example, Singapore is working with China on a project to help develop environmentally friendly townships via the Singapore-Tianjin Eco-city project. Access to funding for such projects is the key to the success of developing a sustainable model of urbanization and production of renewable energy.

The financial stability environment in the euro area overall remains favourable, but it has become somewhat more challenging in recent months. The results of the European stress test published last Friday show that euro area banks are increasingly resilient to financial shocks. This also reflects the continuing economic expansion, which has strengthened private and public balance sheets alike. Still, there are risks. These include liquidity risks in the non-bank financial sector that could be transmitted to the broader financial system. Developments in this area should be closely monitored, and the regulatory and supervisory framework for non-banks needs to be strengthened. Asset prices also require close monitoring. While there is currently no compelling evidence of overstretched asset valuations at the euro area level, we are seeing some localised risks. However, euro area monetary policy is not the appropriate tool with which to address such risks. They call instead for targeted macroprudential policies, which can be tailored to local and sectoral conditions. The recent decisions by the Central Bank of Ireland are an example of how macroprudential policy can promote financial stability. As regards Brexit, with negotiations ongoing and less than five months to go until the United Kingdom’s departure from the European Union, it is essential to prepare for all possible outcomes, including a no-deal scenario. While the direct trade effects of a hard Brexit would be limited for the euro area as a whole, Ireland is more exposed due to its very close trade relations with the United Kingdom.