to adapt to the new digital ecosystem. if banks are to remain as the core of financial intermediation, they must retain customers, now increasingly susceptible to be poached away by non - banks offering cheaper, more convenient services. to do so, they must move with the times. this was very much at the back of my mind when we empanelled a task force to examine the terms and conditions in banking contracts in response to growing customer complaints. a report containing 100 recommendations for improving the bank - customer relationship is currently under public consultation. while the need for a fair and inclusive banking sector is the raison d ’ etre of this report, we also want to drive home the point that the long - term survival of banks rests on the extent to which they are able to place the customer at the centre of their business. banks must work with their customers, not against them, and look for win - win outcomes. this is the “ burning platform ” i mentioned earlier which pits traditional banks against new entrants in financial services, offering peer - to - peer lending, crowd - funding, and cheap settlement in cryptocurrencies, amongst others. innovation is key. it will emerge as the single most important factor driving sustainable topand bottom - line growth in banking. innovation is not just the provision of new products or the creation of a new customer experience. it goes beyond this. it implies doing things differently right across the entire business model. archaic structures need to be dismantled, and old mindsets discarded, to create a new, nurturing environment. consolidated it platforms will provide the launch pad for new successive waves of change. digital banking will force - feed change in back - office procedures, payment and clearing processes, and bank documentation. one example among many is trade finance documentation which is changing very rapidly to adapt to the world of e - commerce and e - tailing. implications for the regulator what about the regulator in all this ferment of change going on all around us? the bank could hardly stand by as a spectator. we have been preparing for transition to a new business era. we are rejuvenating our staff, renewing and updating our skills set, and rolling out new rules and regulations. we have inducted a director of technology in the highest echelons of the bank. coping with the “ bank different ” credo of afrasia has itself been a learning experience for the bank! we must continue on this path, enhance our supervisory

% as of last friday, singapore strait times index by 32 %, the nikkei 225 by 28 % and the other asean indices by between 50 - 60 %. thus, markets adjust irrespective of the exchange rate regime and the unit of account. 28. is there any easy way of avoiding the pain of adjustment in asia due to rising global competition? the answer is clearly no. as a general rule, the faster we adjust, the less the pain. there have been different approaches to this issue. there are some who think that a floating exchange rate regime would cushion the pain, but many forget that hong kong has tried the floating exchange rate regime before, in 1974 - 83. during that period, growth was more volatile and inflation much higher than what we are experiencing now. as an open economy with trade accounting for 285 % of gdp, any inflation would be immediately imported under exchange rate volatility. the recent experience in asia actually shows that contrary to the theory, floating exchange rates requires even higher interest rates, because of the higher risks associated with exchange rate volatility. 29. here i would like to correct the common image that the hong kong ’ s exchange rate regime is a peg. the hong kong dollar is a fixed exchange rate, not a peg which can be adjusted from time to time. the linked exchange rate system in hong kong operates as a currency board system whereby the issue of hong kong dollar notes is fully backed by the us dollar at the fixed rate of us $ 1 to hk $ 7. 80. such a note - issuing mechanism ensures that currency issued is fully backed by foreign exchange. with the sustained budget surplus and accumulated surplus on the exchange fund and land fund assets, the actual amount of foreign reserves in hong kong amounted to us $ 88. 1 billion at the end of september, the third largest in the world. this is more than seven times hong kong dollar cash in circulation or over three times hk $ m1. 30. the currency board system has an automatic adjustment mechanism to maintain exchange rate stability. when there are outflows of funds from the hong kong dollar, the hong kong monetary authority ( hkma ) will sell us dollars to banks for hong kong dollar. on settlement day, the hkma will debit the clearing accounts of the banks for the necessary amounts of hong kong dollars in return for the us dollar that will be credited to the new york accounts of the same banks. since banks may have sold more hong kong dollars than they have