With the benefit of hindsight, it has become clear that in the lead up to the global financial crisis, many financial systems were close to, or had long surpassed, the point where bigger was better. The breakdown of financial systems The gradual severance of the link between finance and the real economy, in my view, represents the foremost factor that has weakened the positive role of finance and increased the potential for financial instability. As witnessed during the recent crisis, the degradation of finance eventually rendered its noble economic function of intermediation as ineffective, causing greater harm than good to the economic growth process. The various factors contributing to the recent crisis have already been extensively researched and discussed, highlighting that in most cases finance had become highly disconnected from real, productive economic activity. Additionally, is the role that it had in altering the relationship between the growth and distribution of risks created distortions in which the gains from excessive risktaking were privatised among the few while the losses were socialised among the many. The abuse of securitisation and the “originate and distribute” model was a particularly telling display of this malaise, severing the link between risk-taking agents and those who ultimately bore the risk. While intended to facilitate better risk management by transferring risk from the banks to a diversified set of investors, this distancing gave rise to problems in the incentive structure and in the availability of information. There was a clear breakdown in the relationship between creditor and borrower.

May I take this opportunity to thank our fellow regulators for their support in the setting up of the Academy and in providing guidance on its future work through the Board of Directors, which includes representatives from the Insurance Authority, the Securities and Futures Commission, the Mandatory Provident Fund Schemes Authority alongside the Hong Kong Monetary Authority. 6. Ladies and gentlemen, today the AoF will also confer Fellowship upon 10 distinguished leaders in recognition of their outstanding achievements and contributions to Hong Kong in the field of finance. May I take this opportunity to congratulate the Fellows and to express our deep appreciation of their remarkable achievements and contributions to Hong Kong over the years. 7. Before I conclude, let me express our sincere gratitude to the members of the Experts Group, Preparatory Committee, Exchange Fund Advisory Committee and the Financial Secretary, who is also the Honorary President of the Academy, for their support and 1/2  BIS central bankers' speeches  contributions that have made it possible for us to launch the AoF within a very short period of time. Lastly, the Managing Director of the International Monetary Fund, Ms Christine Lagarde, has asked me to convey her apologies for not being able to officiate at today’s ceremony as planned. Although not being able to join the occasion in person, she will deliver a video message to us later on. Once again, I thank all of you for joining this ceremony today. Thank you for your kind attention. 2/2  BIS central bankers' speeches