5/16  BIS - Central bankers' speeches  For example, if MAS wanted to hedge against such negative currency translation effects, we would have to sell US Dollars from the OFR and buy Singapore Dollars. That would negate our interventions in the foreign exchange market to implement monetary policy and cause the Singapore Dollar to appreciate much more, thereby harming the economy and, not to mention, depleting the OFR. The remaining 30% of the loss, or $ billion, was due to net interest expenses from MAS' money market operations to mop up excess liquidity in the banking system. Money market operations are part and parcel of MAS' monetary policy function. Like most central banks, MAS carries out money market operations to manage the level of liquidity in the banking system. In Singapore, money market operations are also a complement to our foreign exchange intervention operations. In general, there are strong appreciation pressures on the trade-weighted Singapore Dollar due to heavy capital inflows. MAS has to periodically intervene in the foreign exchange market by selling Singapore Dollars and buying US Dollars to dampen these pressures and keep the trade-weighted exchange rate within the policy band. When MAS does this, it accumulates OFR and injects Singapore Dollar liquidity into the banking system. MAS then conducts money market operations to withdraw any excess liquidity. There are a variety of money market instruments MAS uses to withdraw liquidity but they all incur an interest cost.
But before I get into the details, let me say that I believe the LTCM episode and the supervisory response to it is fundamentally about two things: leverage and good judgment. Leverage is a fact of life in our financial world, and is a key part of the risk-taking necessary for the creation of wealth. But sometimes banks go too far in extending credit to their customers and counterparties. That’ s where good judgment comes in. I know - - I’ ve been there. I was a commercial banker for 22 years before becoming President of the New York Fed, and I can tell you that the most important decisions a banker makes are how to lend and to whom. Those decisions are not easy, and often involve many shades of gray. One of our aims as supervisors should be to see that banks are using the right tools to make those judgments. The importance of these issues extends beyond banks and their supervisors. Sound credit policies and procedures are essential not only for the stability of individual banks, but also – and more importantly – for the health of the financial system and the economy as a whole. This is because banks play a pivotal role in our economy as providers of credit. If banks make poor credit decisions with respect to a borrower, including a hedge fund like LTCM, the financial system and our economy will suffer.