the need for a stronger focus on creating an environment in which policymakers will have the confidence to act. this requires a strong mandate, sufficient policy instruments, and clear accountability structures. while macro - prudential policy has a clear and important role in contributing towards financial stability moving forward, it does not however diminish the important role of micro - prudential supervision. indeed, the notion that more developed macro - prudential policy frameworks can, over time, provide a credible alternative to the close supervision of systemic financial institutions – for example, through the development of better predictive macro indicators, or through reliance on recovery and resolution plans alone – is misplaced. there can be no substitute for the effective ongoing supervision of financial institutions, which relies on supervisory assessments and judgments, and enhances the understanding of firm behaviours in a manner that models and plans, no matter how sophisticated, will never be able to fully achieve. efforts should therefore also be accorded towards further strengthening based on the article entitled “ the term ‘ macro - prudential ’ : origins and evolution ” published in the bis quarterly review march 2010, which contains excerpt of the unpublished minutes of a meeting of the cooke committee ( the precursor of the present basel committee on banking supervision ) bis central bankers ’ speeches the conduct of micro - prudential supervision and promoting the complementarities between micro - and macro - prudential policies. let me now turn my remarks to the growing role and relevance of islamic finance in contributing to the global agenda of fostering sustainable growth that is firmly anchored to the real economy. the core proposition of islamic finance draws from its inherent features and the values that it brings to the economy, and the tremendous potential that it offers in supporting sustainable economic growth and in safeguarding financial stability. these core propositions are derived from the shariah, which dictates that islamic financial transactions must be supported by underlying productive activities. this shariah ruling ensures a close link between financial transactions and the real economy. innovation and intermediation in islamic finance are thus aligned to generating productive economic activities. there is also strong discouragement against excessive risk undertakings and a prohibition against speculative elements. these rulings also serve to insulate the islamic financial system from excessive leverage, which in turn contributes towards promoting financial stability and its long - term sustainability. these fundamental elements resonate with the call for banking to focus on its core function of providing financial services that add value to the real economy. this recent decade

the extended period of low inflation and low interest rates incentivised greater risk - taking. cumulatively, these developments contributed to a dangerous build - up of financial imbalances. this has prompted a rethinking of the issues related to the financial business and its models, and wide - ranging regulatory reforms by the international community. related to these issues is the question on the “ appropriate ” size of the financial sector. as economies develop, the size of financial sector assets and, correspondingly, the value - added contribution of the financial sector, is expected to increase. however, while there is a fundamental relationship between the growth of the financial sector and the real economy, the relationship is not wellunderstood or captured in current macroeconomic models. this creates a potential challenge for policymakers to determine the point at which growth of the financial sector may be outstripping the demands and the potential of the real economy. this issue has become even more pronounced with greater regional and global financial integration, and in countries that are also international financial centres. to the extent that corporate and personal income growth is driven by financial transactions rather than by an increase in production or bis central bankers ’ speeches employment growth, economies become potentially more vulnerable to the consequences of financial system stress. the recent global financial crisis provides a distinct example of how excessive leverage and exponential growth in financial activities that are detached from the growth trajectory of the real economy can become a source of instability. leverage increased sharply in the years leading to the crisis, buoyed by years of strong economic growth. in the advanced economies, bank balance sheets exploded, growing to multiples of annual gdp. for example, in the case of iceland, the three largest banks that were nationalised in early october 2008 had seen their total assets expand from 100 percent of gdp in 2004, to more than 900 percent of gdp as at end - 2007. similarly in ireland, assets in their financial institutions with substantial domestic businesses were more than 400 percent of gdp by 2008, while in the united kingdom, bank assets were more than 500 percent of gdp prior to the global financial crisis. the sheer size, complexity and leverage in the banking system increased the fragility of financial institutions and limited their ability to absorb even small losses, thereby resulting in widespread and deep economic dislocations. this expansion of financial activities was also in part due to the activities in the shadow banking system, which in the united states, grew to be even larger than the traditional banking sector in