rasheed mohammed al maraj : global regulation and offshore centres – onshore vs offshore address by his excellency rasheed mohammed al maraj, governor of the central bank of bahrain, at the gcc private banking conference, manama, 7 march 2012. * * * your excellencies, distinguished guests, ladies and gentlemen : it is a great pleasure and a privilege to be addressing this conference. over the course of the day speakers and delegates will debate and reflect upon many aspects of the private banking environment, and i have no doubt that the initiatives which will be identified here will provide interesting and useful ideas. my speech today will concentrate on the importance of regulation to the financial industry in general, and the private banking environment in particular. i shall explore what the cbb has done, explain why that has been beneficial to our stakeholders, and provide an insight into our priorities in the coming period. the cbb has a proud regulatory history. our framework has been moulded over many years, and it has served our stakeholders well in times of local, regional, and international turbulence. it provides clear leadership and direction to licensees, and it is designed to provide investors with a detailed understanding of the way in which the cbb expects banks and financial institutions to discharge their responsibilities. this is due, at least in part, to our philosophy of “ constant improvement ”. as such a great deal of our work is pro - active, and all of our work is designed to mitigate risk in a controlled manner whilst accepting that risk is an inherent ingredient in the financial industry. we consult with practitioners and the various other stakeholders in the financial sector to understand their needs and desires, and we strive to be responsive to those needs. a fundamental premise of our approach is that we make considerable efforts to ensure that our licensees understand the importance of, and implement and comply with, recognized international best practice in their field. but not everything is local. global capital flows are critical for bahrain. we are a small nation ; we have an open economy and we do not impose complex capital controls. we welcome ethical investment from any source, and we recognize that inward capital flows benefit the wider economy. in keeping with those goals, the cbb has introduced a number of improvements to our regulations during the recent past, many of which have had an impact on the wealth management industry, either directly or indirectly. for example the role of corporate governance has been enhanced, and the cbb was a key player in the

investors seek to exploit the new opportunities created by the improved environment. households seek to raise consumption in anticipation of higher future incomes and wealth. such efforts rely on the financial sector : finance provides the necessary bridge between opportunities and expectations today, and higher productivity, output and incomes tomorrow. 4 how do financial intermediaries manage these inter - temporal flows in such an uncertain environment? the challenge of doing so is compounded by changes to the financial sector itself. technological advances or regulatory changes in the real economy are also likely to have direct implications for banks and financial markets. financial innovation abounds in such a situation. financial regulators are faced with new instruments and processes to police. in this context, financial market participants face both a favourable macroeconomic environment – stronger economic growth and relatively benign price developments – and many new, and apparently profitable, opportunities at the firm level. the question arises of whether such circumstances prompt them to lapse into euphoria : to take on more risk ; to expand balance sheets more rapidly ; to increase leverage ; and to bid up asset prices. 5 of course, the underlying shock to fundamentals is in many cases favourable and offers the prospect of greater prosperity. but the danger exists that financial imbalances may emerge in such a situation. such imbalances both increase the vulnerability of the financial sector and the broader economy to future economic shocks and may create unsustainable positions in financial institutions that will eventually unravel of their own accord. in principle, economic fundamentals impose a limit on such euphoria and imbalances, thereby introducing self - equilibrating forces for the economy. but assessing such fundamentals is notoriously difficult – for policy - makers and the private sector alike – all the more so because the evolution of fundamentals themselves can be influenced by the pervasive euphoric state of financial markets. in this context, levels of leverage, liquidity or asset prices completely outside historical norms can be justified on the basis of a four - word refrain, recently used by carmen reinhart and ken rogoff for the title of their book : “ this time is different ”. 6 but, as reinhart and rogoff demonstrate, experience over several centuries reveals that the self - sustaining booms induced by this sequence of events are ultimately unsustainable. they culminate in financial crash, with severe consequences for both the financial sector and the stability of the real economy. this time is not so different after all. see :