At the same time, increasing interest from international investors to diversify a greater proportion of their portfolios to Asian assets has created business opportunities for fund managers based in Asia, including Singapore. The local banks too registered good financial performance last year. Altogether, their profit grew by over 40%. Their return on equity also improved by 2-3% points compared to the year before. At the same time, the local banks have also shown improved financial health. Asset quality has improved further. Classified loans represented 1.6% of total loans in 2006 compared to 2.2% in 2005. The local  BIS Review 74/2007  1  banks remain well capitalized, meeting MAS’ regulatory requirements and in comparison with peer banks internationally. Taken together, these developments bode well for Singapore’s efforts to develop itself as an international financial center. Barring any unforeseen shocks, 2007 looks to be another good year for the financial services sector. Navigating the risks ahead That said I would be remiss if I did not point out some of the risks on the horizon. For now, the global environment appears benign with rosy prospects for growth worldwide. Nevertheless, various uncertainties could quickly unsettle this. For one, it is unclear how the mounting global imbalances between the East Asian countries and the developed countries will resolve. A sharp and abrupt adjustment would affect the global economy. It also remains unclear how long the golden era of good growth coupled with low inflation will continue. Already, fears of inflation have resurfaced.

Liquidity management More capital is important for the solidity of the banking sector. However, we must not forget that the turbulence first translated into a liquidity crisis, as was the case for the UK bank Northern Rock in autumn 2007 when depositors rushed to withdraw their savings. For Norwegian banks, the crisis has essentially been a liquidity crisis. Norwegian banks were affected because they became dependent on market funding. The financial crisis has revealed that substantial short-term money market funding is risky. When it comes from foreign markets, the risk of funding shortfalls increases. In the mid-1980s, Norwegian banks also borrowed heavily in foreign markets. In spring 1986 – following a sharp fall in oil prices – confidence in the Norwegian economy plummeted, and liquidity flowed out of the country as was the case in autumn last year. The funding source that is considered to be the most stable, deposits, has become less important over time. It is our assessment that the funding of Norwegian banks is a structural problem. When the financial crisis is behind us, we expect banks to give increased weight to deposits and long-term loans as funding sources. BIS Review 131/2009  13  The maturity of banks’ market funding should be longer than it was before the financial turbulence. During the financial crisis, investors were reluctant to provide long-term funding and required high risk premiums. Prospects for banks in general have now improved and risk premiums have declined. Strengthening of banks’ equity capital is helping to reduce the risk facing bondholders.