Our experience tells us that financial reform takes time and determination, and the ability to bite the bullet and bear the short-term pain. It is also very much a continuous process, with financial innovation creating new circumstances and presenting new challenges all the time. 14. I believe that we have successfully achieved this, which is the important reason why we have stood out as an oasis of calm, at least relatively speaking, in the storm of financial turmoil that is currently sweeping through the region and beyond. Some say that we are sticking out like a sore thumb, referring particularly to our fixed exchange rate link with the US dollar. I can of course respond to that by pointing to how well our linked exchange rate system, a currency board system that functions on auto-pilot, has worked. I can point to the supervisory efforts which have put our banking system on a very sound footing, and to our advanced financial infrastructure which has helped tremendously to contain and manage risks of a systemic nature. But many of you are, I am sure, already sick of my talking all the time, and may even dismiss what I say as trumpeting. I do not blame you. I am well aware of the possibility that over ten years of direct involvement in monetary reform in Hong Kong may have introduced a degree of bias in my views on the subject, which I have tried consciously to avoid. 15.
And so when exchange rates move sharply, which they do, the currency mismatch results in large losses. 12. But I suppose we all learn from mistakes. We in Hong Kong did so the hard way in the early 1980s when the situation was compounded by uncertainties about the political future of BIS Review 115/1997  -3-  Hong Kong. We had our currency crisis in 1983, after nine years of operating with a floating exchange rate, against volatile capital flows, without any effective mechanism for monetary management or currency anchor. Our banks had been overly exposed to credit, maturity and currency risks, and a total of seven banks had to be rescued directly or indirectly through the use of public funds. In short, we had been complacent. 13. But, thankfully, never have we been in any doubt about the need to maintain free and open markets, and a liberal financial system. The correct response to financial turmoil is not to resort to controls or to apportion blame, but to put one’s own house in order, and ensure that one is in a position to cope. This we did through a series of reform measures to strengthen our monetary and financial systems implemented in the past ten years. This was, in part, also spurred by the desire to minimize the risk of possible financial disturbance ahead of and through political transition, and to provide the environment for Hong Kong’s continuing development as an international financial centre, as required under the Basic Law.