Case Study 4: The creation of our present day “virtuous cycle” Mr. Chairman, I would like to now place before you, yet another significant example of harmonization between the Monetary and Fiscal policies, which led to the creation of a new “virtuous cycle” in relation to inflation, interest rates, investor confidence and sustained growth, in our country. As we are all aware, Sri Lanka had been long trapped in a “vicious cycle” of high fiscal deficits leading to high inflation; high inflation leading to high interest rates; high interest rates leading to low investor confidence; low investor confidence leading to sluggish investment; sluggish investment leading to low growth; low growth leading to high debt; and high debt once again leading to high fiscal deficits. This was the vicious cycle that we had been trapped, for more than 5 decades since independence. It is true that we have had one-off spurts of high growth or short periods of low inflation at various times in our history. However, we have to acknowledge that, other than in 2010 and 2011, we have never had over 8% growth in consecutive years, or, for that matter, been even able to record an average growth of over 5% over a 5 year period, prior to 2006! At the same time, other than the period February 2009, till now, Sri Lanka had never enjoyed a period of even two continuous years of single digit inflation, and, believe it or not, our level of average inflation was over 12% prior to that!
Among the buffers Hong Kong banks have built up are a capital adequacy ratio of above 20%, and a liquidity coverage ratio of above 150% – well above international standards. The classified loan ratio is just 0.56%. 2/5  BIS central bankers' speeches  22. At the same time, with a return on equity of 13% last year, the Hong Kong banking industry is also among the most profitable in Asia. Capacity 23. Next, I would like to look at the capacity of the industry – skills and training. 24. It is not a coincidence that one of the financial industry’s main professional bodies – the cohost of today’s gathering – is the Hong Kong Institute of Bankers, which was founded back in 1963 to enhance the profession. 25. Everything in the financial services industry goes back to people. Since the financial crisis 10 years ago, we have seen a significant increase in the complexity in capital, liquidity, risk management and other requirements. On top of that, we have rapid developments in technology and related areas like cybersecurity. The industry has to constantly upgrade its professional expertise and standards just to keep pace. 26. But unlike some other financial sectors, our regulatory framework for banks focuses on authorizing corporate entities. There is no formal licensing regime that applies to individual banking practitioners. Our approach has therefore focused on encouragement and guidance – and to benchmarking.