During the Global Financial Crisis and subsequent Eurozone crisis, macroeconomic shocks, financial market stresses, and institution-specific vulnerabilities interacted in complex ways with consequences for both systemic stability and the safety of individual institutions. The two-way flow of information and sharing of perspectives between the central banking and supervisory arms of MAS proved invaluable in helping us assess a rapidly evolving situation and co-ordinate appropriate policy responses in a timely manner. Having central banking and financial supervision within one organisation is not the only way to achieve better financial stability outcomes. It makes sense in a small country like Singapore. Larger jurisdictions have sought the same outcomes through strengthened coordination mechanisms among the various agencies whose work contributes to financial stability. The Financial Stability Oversight Council in the US and the Financial Policy Committee in the UK are two good examples. Third, being a financial regulator as well as promoter of financial sector development helps ensure that regulation is not only robust but sensitive to the broader needs of the economy. Lest there be any doubt, financial stability is our overriding objective. But a safe financial sector that does not help to meet the needs of businesses and individuals or support economic growth and development misses its purpose. Sound regulation is about promoting a robust yet vibrant financial sector that supports the wider needs of the economy. Our experience has been we can achieve better stability and development outcomes within one organisation with a shared purpose rather than separate agencies with possibly conflicting goals.

The absence of a sufficiently thorough system of banking supervision and the lack of transparency not only became problematic before the crisis, but also caused confidence problems later on. Fourth, the quality of the assets of the banking system is vital for the soundness of macroeconomic policy. In allocating savings to investment use, the banks should be extremely careful about the risks that must be taken for a variety of reasons. There are five main types of risk that the banking system and of course the appropriate authorities have to deal with: interest risk; foreign exchange risk; maturity risk; loan risk; and market risk. A sound financial system is the best assurance of efficient monetary and fiscal policies. In my view, all four of these factors contributed to the change of foreign perceptions and sentiment and produced a cutback in normal financing (in fact, 95 percent of external flows to emerging market countries come from the private marketplace). This cutback, in turn, weakened the external reserve positions of these countries. Then the combination of weak reserves and a weak financial sector brought on a liquidity crisis. We are now in a position to draw some lessons from the East Asian crisis. First, policy implementation must pursue sound macroeconomic policies in order not to lose the confidence of the markets. And second, four main principles must constantly be kept in mind: •  The currency should not be allowed to appreciate, except as part of a bold anti-inflation program.