If two people have telephones they can at least call each other, which has a value. For every new telephone owner that is linked to the telephone network the benefit of having a telephone to those who are already connected increases as the number of people that can be reached has now increased. This reasoning about telephony can easily be applied to payment services where everyone wants to be able to send payments to and receive payment from everyone else, for example a service for payments between private individuals (P2P). The reasoning becomes more complicated when we talk about payments from consumers to companies (P2B). Payment service markets with two distinct sets of customers for payment services and payment flows in only one direction are usually called two-sided markets. The market for point-of-sale payments (POS) is one such two-sided market. The payments on this market go from the private customer to the company and not the other way. The card market is only attractive to merchants if there are a sufficiently large number of consumers with cards. Similarly, it is only attractive for consumers to have cards if it is possible to use  BIS central bankers’ speeches  3  them in a sufficiently large number of shops. A new payment service on a two-sided market must solve this “chicken and egg” problem, that is ensure that sufficient numbers of consumers and merchants start using the service. Launching a product that is not fundamentally based on existing payment services thus entails major problems.
The labour market is also expected to strengthen, with the unemployment situation improving for the rest of the year. Against this backdrop, MAS shifted to a policy of modest and gradual appreciation of the $ in April 2004. This policy stance was assessed to be supportive of economic growth, while ensuring low and stable inflation over the medium term. Let me now turn to other aspects of MAS’ work during the past year. II  Regulation and supervision  First, in the area of regulation and supervision, we issued the “Objectives and Principles of Financial Supervision in Singapore” monograph earlier this year. This will help the financial institutions we regulate and supervise better understand the desired outcomes of our supervision. Let me say a few words specifically on risk-based capital. We issued details of changes to the capital adequacy requirements for Singapore-incorporated banks in May 2004. We believe the new requirements are prudent but competitive, and more sensitive to the banks’ actual risk profiles. These changes will give the banks greater flexibility to manage their capital while maintaining a prudent buffer against future shocks. The Basel Committee on Banking Supervision finalised the New Basel Capital Framework last month. We intend to adopt the New Framework at the same time as the G10 countries. We will continue to work closely with the Singapore-incorporated banks to assess the impact of the New Framework and determine how best to adapt the proposals for Singapore.