Navigating the crisis But overall Singapore was less affected than most of the region. The banks were unshaken, and Singapore companies did not keel over. Why was this the case? Firstly our economic fundamentals were sound. We had pursued pro-business and pro-development economic policies for many years, and maintained consistently low inflation.5 We had kept our economy open, and had taken a market-oriented approach towards economic development. So 4 5  Keynote Address, Meeting on Good Governance for Financial Institutions, Bangkok, 10 June 2000. Singapore’s inflation averaged 2.1% between 1981 and 1999 while the average figure for the Group of Seven developed countries over the same period was just over 4%. 5  BIS Review 76/2000  investments did not go into industries in which we lack competitive advantage, and Singapore companies were generally efficient. Secondly, the Government had a strong financial position. Indeed it continued to register a budget surplus throughout the crisis. We had no foreign debt, much less short-term debt. Foreign exchange reserves were comfortable. Thirdly, our response to the crisis was to reduce business costs directly, to help businesses stay viable and so preserve jobs. No company was bailed out by the Government; no creditor was prevailed upon to maintain a loan to a failing borrower. Instead we granted rebates in taxes and government charges across the board, and reduced employers’ monthly contributions to employees’ retirement fund – effectively a wage cut. Fortunately union leaders understood the gravity of the crisis, and helped to persuade workers to accept this unpalatable prescription.

Ladies and Gentlemen This workshop is being held at a time when the global economy has come under serious strain caused by the sub-prime mortgage crisis in the US. Appetite for profit and poor credit risk underwriting standards led to a surge in sub-prime mortgages. This brought about a real estate price bubble as demand for residential properties grew. The situation culminated into a liquidity and credit crunch in financial markets. The financial crisis has spread to other countries directly through financial market linkages and indirectly through trade. Recent projections indicate that the global financial crisis will lead to global contraction in economic output with a corresponding reduction in incomes, a rise in unemployment and decline in volumes of trade. Ladies and Gentlemen The current state our financial sector calls for a new approach to the supervision of banks and other financial institutions. Risk Based Supervision (RBS) represents a paradigm shift from the traditional rules based, historical, standardised and point-in-time assessments to a process-oriented, forward looking, continuous and risk profile driven approach to supervision and regulation of the financial sector. RBS is a structured and forward looking process designed to identify risk factors to which individual banks and other financial institutions and the entire financial industry are exposed. This approach enables supervisors to critically assess various risks and the risk management systems of banks and other financial institutions in order to assess the risk profile of these institutions.