level the playing fields ”. it is indeed so that regulation and liberalisation happen in cycles, and periods of deregulation are often followed by periods of re - regulation. given the devastating effects of the most recent global financial crisis, the astronomical social costs resulting from it, and the perceptions around the role that financial engineering and technology alongside deficient supervision and regulation played in the run - up to the crisis, we have inevitably been catapulted into an epoch of re - regulation. regulators and economic agents alike face a number of challenges at this point in time. these include : 1. international standards have been developed – for markets, regulators and participants – to assist with the management of risks and even behaviour. whether they are encapsulated in the new basel iii requirements for capital or liquidity, or in the principles for financial market infrastructures, or in the codes of conduct, these standards are introducing requirements that require adherence. non - compliance with these standards is likely to lead to hefty penalties. there is a strong demand for participants to be accountable and responsible, and to incur liability if they are not playing by the rules. this has resulted in numerous large financial - sector firms being slapped with fines running into billions of dollars. 2. standards are inextricably linked to the next point, which is governance arrangements and remuneration. governance arrangements have been a focal point for some time oecd directorate for science technology and industry, 2012, innovation for development. bis central bankers ’ speeches now, and recent events in international markets have highlighted the importance of good governance and of ethical behaviour from all stakeholders. the global financial crisis has also refocused the attention of regulators on the remuneration structures of management and other individuals participating in financial markets and systems. this, in some ways, can be related to what economist describe as the “ agency problem ” and which under certain conditions may result in risk - shifting. this is a key area of focus of reform in attempts to promote the soundness of the financial sector in particular, hence governance arrangements and remuneration continue to be intensely discussed at various international regulatory forums. 3. “ shadow - banking ” and “ new ( non - bank ) participants ” have come into sharp focus since the global financial crisis due to their role in the run - up to the global financial crisis and in financial regulatory arbitrage. efforts to regulate these entities will intensify. this is likely to draw criticism from certain quarters but

of asset - backed securities and cdos and to the proliferation of vehicles such as abcp conduits and sivs. in this respect, the failings of lighttouch regulation and the short - sighted focus on the banking system appear overwhelmingly clear. on the one hand, the tail risks hidden in the payoff profiles of highly rated securitisations were not understood by financial supervisors. on the other hand, the migration of risks outside the traditional banking sector into a thinly capitalised shadow banking system lacked appropriate oversight. this process resulted in a weakening of the prudential rules, a sharp deterioration in bank capital, an overall decline in lending standards, an unsustainable growth of leverage, a persistent under - appreciation of risks and, ultimately, in an unprecedented degree of fragility and interdependence in the financial system. looking ahead, supervision will have to move towards taking a proactive and forward - looking approach. likewise, the regulatory net needs to be cast wide enough to encompass all financial institutions and activities capable of generating systemic effects. finally, an assessment must be made of how the supervisory authorities applied the tools available to them and whether their decisions were taken on the basis of an independent judgement or were somehow influenced by external factors. historical experience offers ample evidence that inadequate arrangements as regards the independence of the supervisory authorities contributed to the emergence of financial instability. the east asian crisis of 1997 – 1998 is a frequently quoted example of weak regulations and forbearance, resulting from political interference in supervisory activity and leading to a financial crisis. institutional arrangements should ensure that supervisors are independent from the political authorities and not at risk of regulatory capture by the supervised institutions. in some cases the desire to enhance the competitiveness of domestic financial institutions may have influenced decisions that allowed such institutions to behave in a less prudent manner. these are important issues, and should be part of the international debate on how to enforce effective supervision so as to strengthen the capacity to mitigate future financial crises. 3. compensation of top executives let me now turn to the topic of executive compensation. remuneration of top executives has recently attracted special attention, notably in the financial sector, where the distribution of sizeable severance payments, entirely disconnected from the institutions ’ performance, has caused a public outcry. moreover, the financial crisis has revealed that inappropriately designed compensation mechanisms could lead to excessive risk - taking and should therefore be subject to policy intervention. the principles for sound compensation practices elaborated by