This requires a strong mandate, sufficient policy instruments, and clear accountability structures. While macro-prudential policy has a clear and important role in contributing towards financial stability moving forward, it does not however diminish the important role of micro-prudential supervision. Indeed, the notion that more developed macro-prudential policy frameworks can, over time, provide a credible alternative to the close supervision of systemic financial institutions – for example, through the development of better predictive macro indicators, or through reliance on recovery and resolution plans alone – is misplaced. There can be no substitute for the effective ongoing supervision of financial institutions, which relies on supervisory assessments and judgments, and enhances the understanding of firm behaviours in a manner that models and plans, no matter how sophisticated, will never be able to fully achieve. Efforts should therefore also be accorded towards further strengthening  3  Based on the article entitled “The term ‘macro-prudential’: origins and evolution” published in the BIS Quarterly Review March 2010, which contains excerpt of the unpublished minutes of a meeting of the Cooke Committee (the precursor of the present Basel Committee on Banking Supervision)  BIS central bankers’ speeches  3  the conduct of micro-prudential supervision and promoting the complementarities between micro- and macro-prudential policies. Let me now turn my remarks to the growing role and relevance of Islamic finance in contributing to the global agenda of fostering sustainable growth that is firmly anchored to the real economy.

The extent to which these conflicting imperatives can be reconciled in a sustainable manner remains unclear. A focal point of the reforms has been to protect retail banking from the vagaries of investment banking that often has involved higher risk-taking activities. In the United States,  1  As at December 2009. BIS Quarterly Review Statistical Annex, June 2010, Table 19. 2  The Banker publication. 2  BIS central bankers’ speeches  the Volcker Rule prohibits banks from carrying out certain types of investment banking activities if they wished to continue to rely on deposit funding. In a similar vein, in the United Kingdom, the adoption of the recommendations by the Independent Commission on Banking mandates banking groups to establish a separate subsidiary for their retail activities, and it prohibits the subsidiary from undertaking other businesses and risks. Solutions to these challenges are far from straightforward. While these and other reforms by the Basel Committee and the Financial Stability Board are expected to have far reaching implications for the landscape of the financial system as we know it today, they have yet to provide answers to many of the key questions that policymakers and the financial industry need to address in the pursuit of effective functioning and sound financial systems as we progress forward into the future. Since the global financial crisis, significant attention has been directed at evolving an effective macro-prudential policy framework, which can serve to rein in excesses and strengthen the nexus between finance and the real economy.