On the other hand, financial regulators cannot afford to focus exclusively on the health of individual banks and dealers as though they were isolated atoms. The financial sector is a system that hangs or falls together. Moreover, it is swings of exuberance and caution that drive excessive fluctuations in the supply of credit to firms and households. The FPC is about filling the space between monetary policy and microregulation – in an admittedly inelegant phrase, “macroprudential” policy: policy that is focused on the resilience of the system as a whole. BIS central bankers’ speeches  3  The FPC will not be a talking shop. It will have powers. At times, this will affect you directly. We have advised the government that, alongside controls over banks’ leverage and risk-weighted capital requirements, the FPC should have the power to make the banking sector (and other financial intermediaries) hold more capital temporarily against exposures to sectors going through a dangerous boom. Sometimes that will be within the financial sector, as the run up to the latest crisis illustrates. On other occasions, it could be part of the real economy. History points to commercial real estate as an obvious example. Property-related borrowing booms have often driven financial stress. In those circumstances, simply increasing the headline capital requirement might prompt banks to cut lending to sectors of the economy that were not overly exuberant while maintaining lending into the booming sector that seemed to offer wonderful returns. That would be perverse.
If we allow this culture of cynical greed to take root, it will undermine the public trust that is so critical to not just the growth but the viability of financial institutions. The leadership of financial institutions – Boards and senior management – owe a special duty of care to ensure that finance is trustworthy, socially redeeming, and economically purposeful. They must send a clear, unadulterated message, down to the last person in their organisation: “If it is not right, don’t do it. If it is not true, don’t say it.” 26. This is an area that MAS intends to engage the Boards and senior management of financial institutions on. Conclusion 27. We are making good progress in our corporate governance journey. We are now entering a new phase, and must go beyond rule reforms to create the conditions for good governance to flourish – developing a conducive ecosystem for market discipline, building up the competencies of our Board directors, and instilling a culture of ethical conduct and values. 28. I wish you all success in this important new phase of our corporate governance journey. 1  Joseph Barr, “From the Boardroom: The Role of the Professional Director”, Harvard Business Review, May-June 1976. 5. 4  BIS central bankers’ speeches