In addition, these shocks have shown a greater tendency to spread rapidly to other financial markets. The rapidity with which the Asian crisis spread across East Asia in ’97-’98 is a good example. Many of us here today may wish that we have the ability to predict with certainty when the next crisis will strike. It is, however, far more fruitful to adequately prepare ourselves for the inevitable. And that, in short, means enhancing our risk management capability. BIS Review 7/2002  1  Risk Management Initiatives in Singapore MAS will introduce three risk management initiatives to help financial institutions in Singapore better manage the challenges ahead. The first initiative is a MAS guideline that aims to help banks prepare themselves to meet the ill effects of financial crises and shocks. One of the ”defining” features of a financial crisis is that it strikes suddenly and once it has struck, it gives very little time for financial market participants to react. How then can we better prepare ourselves for a crisis? Stress testing offers financial institutions a systematic methodology to prepare for financial crises. Stress testing is based on the old military saying, “the more you sweat in peace the less you bleed in war”. That is, financial institutions that have a comprehensive programme to stress test their portfolios will be better prepared when a stress event occurs.
The Federal Reserve and, to a lesser extent, the Bank of England have also used this instrument to signal their intention to provide a greater stimulus to the economy. Unconventional measures affecting the size and composition of the central bank’s balance sheet are also being extensively used. In the euro area, in October 2008, the ECB changed its liquidity management policy, implementing its main refinancing operations at a fixed rate with full allotment. In May 2009 it lengthened the average maturity period of monetary policy operations and set in train a purchase programme for covered bonds and other similar assets to reactivate this market segment. One year later, faced with the qualitative leap that the euro area sovereign debt crisis entailed, it introduced the Securities Market Programme. Under this programme it purchased, always on the secondary market, public debt of the countries where the tensions were disproportionately restricting the funding of their economies. Finally, when doubts over the viability of the euro reached critical levels in summer 2012, the ECB responded with an announcement that it would, within its mandate, do whatever was needed to save the euro. It designed a new securities purchase programme – the Outright Monetary Transactions Programme – which, though its use has not been necessary, has been instrumental in changing expectations in a favourable direction for market stability and normalisation. Conversely, in the United States, the changes in the Federal Reserve balance sheet have been linked to massive asset purchases as part of a standard quantitative easing programme.