Why macroprudential policy The conventional thinking pre-crisis was based on two assumptions: •  First, asset prices did not matter much. Central banks therefore focused on consumer prices and placed less emphasis on asset prices. •  Second, if risks in individual financial institutions were well controlled, the financial system as a whole would generally be safe. Regulators therefore focused on the safety and soundness of individual institutions and paid less heed to systemic risk. The collapse of the real estate markets in America and Europe, the breakout of the Global Financial Crisis, and the contagion of risk to seemingly sound financial institutions – against a backdrop of relative macroeconomic stability – showed both assumptions to be wrong. Thus was born macroprudential policy – which focused on the health of the financial system as a whole and its interactions with the macroeconomy, particularly developments in liquidity, leverage, and asset markets. In many emerging market economies, macroprudential policy has become an important complement to monetary policy to help secure economic and financial stability. In Singapore, the focus of macroprudential policy has been to promote sustainable asset prices. Asset prices matter for four reasons. First, volatile asset prices pose a risk to financial stability, especially when a run-up in asset prices is financed by easy credit and accompanied by a build-up in leverage in the economy. When asset prices correct, financial institutions’ vulnerability to default and loss increases. Second, asset price inflation is as distortionary as consumer price inflation.
Buyers were limited to borrowing only 50–60% of the total purchase price of the car. Loans had to be repaid within five years. COE premiums for cars have adjusted downwards by about 25%. Macroprudential policy in Singapore is still work-in-progress, as is the case elsewhere. The measures have achieved some degree of success in the property and car markets but it is too early to declare victory. As with traditional macroeconomic policy, these macroprudential measures will be recalibrated as market conditions change. There are many unknowns in the theory and practice of macroprudential policy. We need to better understand the transmission mechanisms through which our various measures operate, their inter-relationships with one another, and unintended consequences or distortions they may create. The field is ripe for further research and, I hope, will challenge the intellectual curiosity of scholars, such as those assembled here this evening. In fact, the ABFER can play a very important role in this regard. Policymakers all over the world, including us here at the MAS, have been thrust into a vastly different environment. We need to update existing policy paradigms and even develop new ones. It is my hope that the collaborative network created by the ABFER will help foster a vibrant research culture and provide thought leadership on the important policy debates confronting this part of the world. MAS is happy to sponsor and support the ABFER. Conclusion Let me summarise my main points.