insurances existed then as now one can also observe another similarity, namely the occurrence of so - called credit insurances. a company that sold credit insurances to the swedish banks in the 1980s and 1990s was svenska kredit. many banks bought insurances against losses from their loans to property companies from this company. when the property market crashed, svenska kredit was unable to meet all of its obligations and consequently went bankrupt. this in turn fuelled the problems for the banks. there are parallels between the swedish credit insurance companies of that time and the current so - called monolines. these are large insurance companies which are specialised in insuring various types of bond loan. those who have bought the companies ’ insurances have traditionally been municipalities, federal states and other bond issuers with poorer credit ratings. the insurance has meant that the bond loans have received better credit ratings and it has been possible to sell them at better rates. in july 2007 the outstanding volume of bonds insured by monolines amounted to a value of usd 3, 300 billion. in recent years these monolines have increasingly been used to insure securities issues with a subprime content. this has meant that they have also begun to experience problems. this risks in turn having repercussions for the securities they have insured and ultimately for those who have invested in them. of course, there are also some essential differences between the most recent financial turbulence and the swedish bank crisis. this applies to both the nature and the scope of the crisis. but, as you will note, there are many and striking similarities in the way people have acted. or as voltaire is supposed to have said " while history may never repeat itself – man always does! ” financial crises arise as a result of imbalances in the balance sheet so why do financial crises arise? the root of most financial crises can quite simply be found in the imbalance between assets and financing. the simplest way to illustrate this is to look at a stylised bank ’ s balance sheet. on the asset side there is lending to companies and households. these are assets that cannot be realised quickly without a substantial discount. in other words, they are illiquid. the bank ’ s financing on the other hand largely consists of deposits from the general public and short - term borrowing on the interbank and securities markets. their financing is thus very liquid. in normal circumstances this is not a problem, as we do not expect all depositors and other

be trying to prevent banks getting into difficulties in the first place. this requires effective management by the banks themselves as well as careful monitoring by the banking supervisors. the first of these we have tried to address through our recent guideline on the corporate governance of locally incorporated authorised institutions. this is intended to encourage high standards of management in such institutions and thus help them to deal with the challenges ahead. these challenges also require enhancements to our system of banking supervision. as recommended by kpmg / barents, we are introducing a more risk - based approach. this aims to be more forwardlooking than the old style of supervision. it focuses more precisely on the various types of risk being run by individual banks, the quantity of such risks and the quality of the system used to manage them. if used properly, it should lead to a less intrusive and less burdensome supervisory approach towards well - managed institutions. we have been developing this approach over the last year and have applied it to a number of the local banks. we intend to roll it out to cover foreign banks next year. it is important that the whole process should be transparent and to assist in this we intend to issue a framework document quite shortly which will outline the new approach. we are also engaged in a major rewrite of our supervisory guidelines to make them more user - friendly and to put them into a common format. this is a substantial project that will take about a year to complete. in the meantime, we shall be issuing new and revised supervisory guidelines in the new format as they come off the production line. conclusions to sum up, our reform package is not intended to be revolutionary. the hong kong banking system is already well - managed and competitive. but even good players need to improve their game as conditions become tougher. the main responsibility for doing this in the hong kong banking context will rest with the banks themselves. we in the hkma are trying to do our bit by removing possible barriers to change in a cautious manner, and by making sure that our supervisory approach remains appropriate to the changing market environment.