become large and costly. to do that in today ’ s markets, and in an environment in which technology and financial innovation can lead to rapid change, the federal reserve is pursuing a more risk - focused supervisory approach. we are well underway toward implementing this new supervisory framework, and initial indications about it - - from both examiners and bankers - - have been favorable. this risk - focused approach to supervision is seen as a necessary response to a variety of factors : the growing complexity and pace of change within the industry, the increasingly global nature of u. s. and world financial markets, and the methods available today for managing and controlling risk. as banking practices and markets continue to evolve, i believe this emphasis on risk - focused supervision will be even more necessary in the years to come. what is “ risk - focused ” supervision? with that introduction, let me clarify what i mean by risk - focused supervision. how does it differ from the way supervisors have traditionally done their job? what does it mean to the banking system? what is it? in short, risk - focused supervision simply means that in conducting bank examinations and other supervisory activities, we will seek to direct our attention and resources to the areas that we perceive pose the greatest risk to banks. in many respects, that would seem rather obvious and hardly earth shaking, and in many ways it is, indeed, nothing new. the federal reserve and the other banking agencies have long sought to identify exceptions and to prioritize examination activities. in the past, though, the business of bank supervision has focused on validating bank balance sheets, particularly the value of loan portfolios, which have been historically the principal source of problems for banks. much of the prior emphasis was on determining the condition of a bank at a point in time. in the process, we would go through the balance sheet, assuring ourselves that a bank ’ s assets and liabilities were essentially as stated and that its reserves and net worth were real. as part of the process, there was a review of sound management practices, internal controls, and strong internal audit activities, but that review was not the initial or primary focus. in earlier times that approach was adequate, since bank balance sheets were generally slow to change. banks held their loans to maturity ; they acquired deposits locally and at a pace similar to local economic growth ; their product lines were stable ; and management turnover, itself, was typically low. by tracking the quality of loans and other assets, examiners could generally detect

. 8. on this, i am very pleased to see that an amendment bill has been introduced into the legislative council earlier this year. the bill adopts a prescriptive and religion - neutral approach, and covers five of the most common types of sukuk globally. products that can meet the key features and qualifying conditions specified in the bill will be given tax treatments similar to those currently afforded to conventional bonds. this means that sukuk issuers and investors alike will no longer be subject to additional tax and stamp duty charges over and above what they would need to pay for conventional bonds. so, passage of the bill will be a very positive step forward in furthering the development of islamic finance in hong kong. synergy between hong kong and malaysia 9. with the legal infrastructure to be in place soon, the next important step will be to develop the islamic financial markets here. we definitely have a lot to learn from malaysia in respect of product development and market operation. as i see it, hong kong and malaysia each has different edges in the financial services industry, and the potential synergy between the two places in developing the islamic financial markets is tremendous. 10. malaysia is undoubtedly an important leading centre in the global islamic finance industry that has accumulated vast experiences and invaluable expertise over the past three decades. it has developed a well - diversified islamic financial market, offering a full suite of products covering sukuk, islamic equities, islamic funds, islamic etfs, etc. its sukuk market is by far the largest in the world, accounting for more than 70 % of global sukuk issuances last year. 4 it has also put in place well - developed financial infrastructure which can facilitate local and overseas market players alike in conducting islamic financial transactions. 11. on the other hand, hong kong as an international financial centre has developed a deep and highly liquid capital market with a diverse base of investors coming from all around the world. more importantly, with hong kong ’ s unique role as a gateway to mainland china and a leading hub for offshore rmb business, hong kong can offer an ideal platform to link islamic and rmb financing together by developing financial products that are shariah - zawya. bis central bankers ’ speeches compliant and, at the same time, denominated in rmb. through hong kong ’ s platform, international investors in the islamic world can easily tap the appealing growth story of the mainland. this is especially given the fact that