Doing this makes the bad scenario less likely to materialize and the improvement in credit supply helps to engineer a stronger recovery than would otherwise materialize.4 The third implication is that the stance of monetary policy needs to be assessed based on the state of the financial system and the real economy. How the monetary policy impulse is transmitted to the real economy is not immutable but changes depending on how monetary policy affects financial conditions and how financial conditions affect economic activity. During and following financial crises, problems in the financial system can impair the transmission of monetary policy to the real economy. When this happens, policy may need to be more accommodative than otherwise in order to achieve its objectives. The experiences of both Japan and United States are cases in point.5 In retrospect, we know that following the collapse of the property bubble and the investment boom in Japan in the 1990s, the Bank of Japan (BoJ) did not follow a sufficiently accommodative monetary policy  4  Ideally, as was the case in the U.S. in 2009, the authorities should require banks to meet their stress scenario capital ratio standards by adding equity capital, with no credit given for reducing assets. This leans against the incentive to deleverage to meet higher capital ratio requirements. 5  See my recent speech “Lessons at the Zero Bound: The Japanese and U.S. Experience”, Japan Society, May 21, 2013. BIS central bankers’ speeches  3  to prevent deflation.

Insurance regulators around the world are adopting risk-based capital and Singapore has been a frontrunner with our current Insurance Risk-Based Capital (RBC) framework introduced in 2004. This risk framework has served us well, and our insurers have navigated largely unscathed through recent financial crises; while the framework allowed for regulatory 2  BIS central bankers’ speeches  intervention in a timely and effective manner. Now, I know this begs the question – if it isn’t broken, why fix it? 17. The answer is that the operating environment for global finance including insurance, has and will become increasingly complex given the more connected global markets, the vulnerability of contagion, an overall low interest rate environment that pushes investors including insurers to target more risky higher-yielding products and potential new risk areas such as in some emerging markets or in technology risks. 18. It is important that our insurance capital framework remains relevant and effective and that insurers operating in Singapore are well-capitalised to weather different crises and risk forms. 19. At the global level, the International Association of Insurance Supervisors (IAIS) has also embarked on the development of capital standards for internationally Active Insurance Groups (“IAIGs”); while the International Accounting Standards Board is expected to finalise its guidance on insurance contracts under IFRS4 sometime this year. Progress on RBC2 20. Last year, MAS published our second consultation paper, which outlined our key proposals for RBC2. We also conducted the first quantitative impact study (QIS1) to assess the potential impact of the proposed changes on the industry.