Ladies and Gentlemen This workshop is being held at a time when the global economy has come under serious strain caused by the sub-prime mortgage crisis in the US. Appetite for profit and poor credit risk underwriting standards led to a surge in sub-prime mortgages. This brought about a real estate price bubble as demand for residential properties grew. The situation culminated into a liquidity and credit crunch in financial markets. The financial crisis has spread to other countries directly through financial market linkages and indirectly through trade. Recent projections indicate that the global financial crisis will lead to global contraction in economic output with a corresponding reduction in incomes, a rise in unemployment and decline in volumes of trade. Ladies and Gentlemen The current state our financial sector calls for a new approach to the supervision of banks and other financial institutions. Risk Based Supervision (RBS) represents a paradigm shift from the traditional rules based, historical, standardised and point-in-time assessments to a process-oriented, forward looking, continuous and risk profile driven approach to supervision and regulation of the financial sector. RBS is a structured and forward looking process designed to identify risk factors to which individual banks and other financial institutions and the entire financial industry are exposed. This approach enables supervisors to critically assess various risks and the risk management systems of banks and other financial institutions in order to assess the risk profile of these institutions.
However, risks only changed form and address in the financial system, just like the energy continuously transforms in the physical universe. Almost all economists agree that we are heading to a slow, gradual and painful recovery. And as a central banker who has spent almost 30 years in this profession, I can tell you that it is a miracle itself to have so many economists agree on one issue with so much vigor and conviction. The future of the global financial system will be shaped by the lessons we derive from our current experience. The ongoing crisis revealed that preventive measures put in place at the local level by national authorities may not be effective to address global problems. It also underlined the importance of international cooperation and coordination in designing and implementing economic policies. It is clearly understood that the only way to prevent future crises at the global scale is multilateral cooperation. However to establish and sustain multilateral cooperation is not an easy task. As (John Maynard) Keynes once said, “The biggest problem is not to let people accept new ideas, but to let them forget the old ones.“ It is very likely that economic agents will try to hold onto their old habits when the effects of the crisis subdue. Appeals on regulators will pile up for a more lenient implementation of rules, regulations, and policies. Politicians will face pressure from their constituents to give priority to local concerns at the expense of global coordination.