The resulting dispersal of risk allows banks to diversify their risk profile as well as their sources of revenue. Providing that the gain from diversification outweighs the increased cost of credit assessment, as banks take on exposure to entities where they have no banking relationship, and that risks are priced fully and appropriately, such innovation should improve market efficiency and lower the cost of intermediation and of capital. These changes in the financial environment, however, resulted in banks increasing their exposure to liquidity risk. Banks originated large volumes of long-term loans in the expectation that they could be quickly and readily sold on, but leaving them with additional funding risks if they could not. Contingent liquidity lines to securitisation conduits and special purpose vehicles rose rapidly with little expectation that they would be drawn. Exposures to higher yielding complex structured products rose, with market participants failing to recognise sufficiently that the high yields offered by such products were in part compensation for higher liquidity and market risk and that prospective risk-adjusted returns were much lower than might first appear from their short historic track record. Moreover, in buoyant market conditions, the compensation for liquidity risk itself was bid down to negligible levels by early 2007 (Chart 2). By that stage, many market participants recognised that compensation for risk-taking was too low, but judged that the business risks of exiting lines outweighed the financial risks of continuing to write new business.
MAS posted a net profit of $ 5.0 billion for the year due to higher returns from MAS’ foreign investments in buoyant financial markets globally. VIII  Further enhancing transparency of MAS’ operations  In this annual report, we have included a new section that highlights our key achievements and work in progress. To enhance transparency of our decision making framework, we also disclosed details of the Board Committees in the annual report. Conclusion In closing, MAS continues to be focused on supporting non-inflationary economic growth, developing the financial sector and enhancing the supervisory framework for a sound and resilient financial sector. The economy is expected to do well this year. The IMF/World Bank Financial System Stability Assessment concluded that our financial sector is robust, and our legal, supervisory and institutional framework is sound. Rating agencies like Standard & Poors, Moody’s, and Fitch continue to re-affirm the strength of our economic fundamentals, which underpin our status as the only Asian country with a triple A sovereign credit rating on both domestic and foreign currency debt. We are committed to Singapore’s vision as a leading financial centre. We continue to stay abreast of market developments and industry concerns and uphold our high standards of regulation and supervision. We will work with the industry to continue to develop a more dynamic, competitive and vibrant financial sector. BIS Review 43/2004  3