Then, when the boom turned to bust, real home prices reversed course, declining by about 40 percent on a national basis, with larger price declines in several states.1 The magnitude of the national price declines was unprecedented during the postwar period. The evolution of the financial crisis illustrates a number of key issues, including the potential hazards of financial innovation, the procyclicality of the financial system, and the importance of confidence in sustaining effective financial intermediation. The housing boom resulted from several factors. Innovations in subprime mortgage lending enabled moderate-income households to purchase homes with negligible down payments. This led to an increase in the demand for housing, which helped push up home prices. Home price appreciation masked the potential riskiness of such lending and, in turn, sustained the wisdom of 1/7  BIS central bankers' speeches  the easier underwriting standards. As long as home values were rising, subprime borrowers could either refinance their loans or sell their homes when the initial teaser rates expired. Thus, losses on subprime and other mortgage lending were low, reinforcing the belief that such loans were “safe.” Easier mortgage underwriting practices were also supported by the ability of mortgage originators to pool their mortgages into collateralized debt obligations (CDOs), transforming lowquality assets into triple-A-rated securities. Investors, including banks, relied too heavily on credit ratings and didn’t do sufficient due diligence on the underlying quality of the assets and the assumptions that underpinned the triple-A ratings.

First, MSB has an important role in supporting an inclusive financial system and facilitating economic transactions that add to growth and prosperity. However, this role has not been fully exploited. For example, there are still significant number of businesses and migrant workers who still prefer informal remittance channels as their choice. It is timely for MSB providers to reassess their products and services in terms of cost, speed, convenience and trusts so that we can draw this group of users away from the informal channels. I believe innovation is key to achieve this and it has to be facilitated by a regulatory framework that is facilitative. Second, global and national efforts to address risks associated with the financial proceeds from criminal activity have turned the spotlight on the MSB industry. The industry’s long term prospects and its contribution to socio-economic development could be undermined if these risks are not properly understood and sensibly managed. The industry may choose to ignore such risks; regulators are inclined to exaggerate them; customers complain about the inconveniences caused by risks mitigants; and criminals exploit them. The regulatory community and the industry present here today have a responsibility to bridge these gaps in a way that protects the industry from abuse for criminal purposes and the integrity of the financial system and undermine the legitimate expectations by users of financial services. There are 3 areas which we should focus collectively and try to find suitable solutions.