They are a weak link in the maintenance of global best practices and regulatory and supervisory standards. If OFCs do not meet international standards they will provide an opportunity for regulatory arbitrage. Financial institutions may be tempted to migrate to such OFCs. This would make it very difficult for other jurisdictions to maintain or raise their own standards. There is work ahead to understand the roles and uses of OFCs and their implications for financial stability. Singapore, together with the other members of the OFC working group, will involve OFCs in this study. We aim to find ways to get them to meet international standards of cooperation in cross-border information exchange and enforcement. We must create incentives for OFCs to play by the rules or at least not disregard the rules. Bringing OFCs under the global regulatory umbrella will help raise prudential standards and enhance the stability of the global system. Strengthening domestic institutions The most important and reliable safeguard for economies which open themselves up to the global market is a strong domestic institutional framework. Governments must strengthen domestic financial institutions and companies by adopting best practices of financial supervision and corporate governance. Banks need a strong credit culture while other companies too need a rigorous business culture. In the helter-skelter growth before the crisis, Asian governments had neglected these institutional underpinnings. While this was not the sole cause of the crisis, in many countries weak domestic institutions undoubtedly made things much worse.
These topics, as I understand, will be discussed this afternoon under the two scheduled working group sessions. To broaden the geographical reach of the large pool of useful reference documents on IRB-related issues produced for its meetings or contributed by the member jurisdictions, the AIGV has developed an electronic library on eBIS to store these documents for access by the supervisory community. The hosting of this event is well timed, as some jurisdictions have already entered into the implementation phase of the Basel II IRB framework and other jurisdictions, including many from Asia, are in the pipeline for the introduction of the framework for adoption by their banks. The event is therefore a good opportunity for representatives of jurisdictions which have yet to adopt Basel II to hear from jurisdictions already implementing the framework about the emerging issues, and to facilitate future communications on this topic among participants. As Chairman of the EMEAP Working Group on Banking Supervision, the HKMA certainly welcomes the opportunity to host this outreach event, and would like to thank the AIGV members who have stayed behind after the regular meeting to provide support. A major innovation of Basel II is that it allows banks to calculate their regulatory capital requirements using the output of their internal rating systems, subject to supervisory approval. Under the IRB Approach, banks employ internal rating systems to produce estimates of one or more risk components, which are then used as the key inputs to the calculation of regulatory capital requirements for credit risk.