Published Date: 06 July 2007

Opening Remarks by Mr Heng Swee Keat,Managing Director, Monetary Authority Of Singapore, at First Annual Risk Management Institute Research Conference on Capital Flows and Asset Prices: The International Dimension of Risk on Friday 6 July 2007, The Ritz Carlton Millenia, Singapore



Prof Shih Choon Fong, President of NUS

Prof Tan Eng Chye, Chairman, RMI

Prof Andrew Rose, Founding Director of RMI

Prof Robert Merton

Prof Duan Jin-chuan

Ladies and Gentlemen


It gives me great pleasure to join you for this inaugural Risk Management Institute Research Conference.   

2   It is opportune that this Conference is being held this week, which marks the 10th Anniversary of the Asian Financial Crisis.  It provides us a poignant reminder of the need to continually keep apace with the evolving developments in the global economy and financial markets.  I therefore applaud the efforts of the organizers of this Conference in bringing together this group of eminent academics, practitioners and regulators to discuss the international dimension of risks.


Financial Risks and Innovation

3   Financial innovation and financial risk management are the two sides of the same coin.  Whether it is traditional banking intermediation or the more recent use of complex derivatives, the core processes and capabilities involve identifying, measuring and managing risks, and pricing and distributing these risks efficiently. 

4   Over the years, the techniques for risk identification and management have improved significantly. For instance, financial instruments such as credit derivatives enable risks to be sliced and diced, and parceled out to individual investors who are ready and willing to take on those risks, and be appropriately rewarded for it.   In banking, the implementation of Basel II capital standards will give impetus to, and incentives for, banks to improve their risk management systems generally, and particularly to adopt advanced approaches for credit risk assessment and modeling. 

5   The need for more tools and instruments in risk management has driven much of the innovation in finance. The increasing range of financial instruments and the wider participation of financial institutions and investors have generally been positive developments.   These add depth and liquidity to financial markets, raise efficiency in intermediation, and allow capital to be channelled to its most productive use.

6   While these are positive developments, there are also challenges.  First, risk management has become more complex and resource-intensive but nevertheless face limitations in addressing high impact tail events.  Second, the potential consequences of mis-pricing of risks have become more significant in the context of the particular global economic and financial conditions we now face.   For instance, with the increasing complexity of financial instruments and the use of embedded leverage, investors may not be fully aware of their exposure to a particular type of risk.  How these risks interact, especially in a stressful event, is not entirely clear. 

7   Risks have also to be understood at different levels – from individual instruments and asset class, to how they correlate with other markets and impact the balance sheets of financial institutions and the broader economy.  While investors and financial institutions assess the risks they take on, regulators need to monitor the systemic impact of these risks.  Increasingly, this has to be done in closer collaboration with fellow regulators and market participants.  

8   The 10 years since the 1997 Financial Crisis have seen great strides made among the Asian economies in crisis prevention, with the reforms and strengthening fundamentals, including in the banking and corporate sectors as well as in its external positions.  Asia is certainly more resilient now, but I would argue needs to remain vigilant.  For example, the surge in capital flows into this region will have to be efficiently intermediated so that they do not become a source of risk to financial and macroeconomic stability.  

9   More broadly, investors have become more vigilant to the fact that the current benign global environment of low inflation, low risk premia and low volatility in financial markets has been unusually long.  Indeed, it is in times of apparent tranquility that we need to look for the potential risk areas and plan for contingencies.

Regulatory Challenge

10   Our challenge, as a regulator, is to allow financial intermediation and innovation, as well as capital flows, to take place, while ensuring that appropriate risk management practices at the different levels are in place. We adopt a risk-focused supervisory approach, one that is responsive to industry developments and welcoming of industry partnership, complemented by market discipline, to achieve our regulatory objectives.  

11   An important foundation in this approach is for participants to understand risks and risk management techniques well, as well as to take ownership for and be at the forefront of managing these risks. 

12   In recent years, MAS has therefore devoted increasing amount of resources to develop our knowledge on risk management.  To better manage and understand systemic risk, we work closely with financial institutions to improve their stress testing practices and conduct macro-surveillance to identify emerging vulnerabilities in our financial system.  We have also improved on our crisis management capability through war-games and reviews of our structures and processes for timely response.

Building Risk Management Expertise, RMI

13   As our financial industry grows in scale and the range of activities, we need to build up risk management expertise in the industry, especially those relating to Asia’s financial environment.   We have been working closely with industry and academia to promote this.  Last year, we launched the Finance Scholarship Programme (FSP) to groom a core pool of specialists with training at the Masters level in targeted fields such as financial engineering, risk management and actuarial science.

14   Our efforts recognize and build on the fact that academia will continue to play a catalytic role in expanding the fields of financial practice.  The 2 outstanding examples are how the Black-Scholes-Merton option pricing model and the Miller-Modigliani propositions have played a seminal role in the development of the derivatives and corporate finance markets respectively.  More recently, financial academia has benefited from insights from sociology and psychology, as seen in the field of behavioural finance.  These contributions underscore the importance of a close engagement between industry and academia.

15   I believe financial and academic institutions in Singapore can help catalyze the creation of risk management knowledge, especially in areas with specific application to Asia.  In this regard, the setting up of the Berkeley-NUS Risk Management Institute is an important partnership between MAS and NUS.  Our aim is to bring the financial industry, academia and regulators to work closely together to create and disseminate knowledge relating to financial risks.  

16   Today’s conference marks a key event in the development of the Risk Management Institute.   In the past one year, RMI Director Professor Andrew Rose has been working tirelessly to set up the research agenda and network, and I would like to thank him for his significant contribution.  The presence of so many eminent scholars and practitioners for this Conference testifies to the effort and impact that Andrew and his team has made.  Andrew has opened many windows for us in training and research, linking us to the network of scholars at the Haas School of Business at Berkeley and elsewhere.   I am also very pleased that he was able to spend a year with us at the MAS sharing the benefits of his expertise with our economists. 

17   I would also like to thank Prof Shih Choon Fong for his strong support, and RMI Chairman Professor Tan Eng Chye and others who have worked very hard behind the scenes.  I am sure Prof Duan Jin-chuan and his team will continue to build on the foundation that has been laid at the RMI.

Doctorate Scholarship Programme

18   To sustain the momentum to develop deeper expertise in risk management, I am pleased to announce the launch of a Doctorate Scholarship Programme (DSP) in Finance.  This is a comprehensive, fully-funded scholarship for candidates interested in careers as financial researchers at our local universities and research institutes, or who wish to enter the industry as highly skilled specialists.   DSP scholars under the university track will serve at our universities and research institutes as the bridge between industry and academia, whilst those under the financial institution track will pursue challenging careers in our partner financial institutions.

19   With this Doctorate Scholarship Programme, Singapore-based financial institutions or universities can send promising executives and fresh graduates to top universities both abroad and locally to pursue specialized doctorate programs.  Candidates midway through their Doctorate studies will also be eligible.  In total, $20 m will be set aside under the Financial Sector Development Fund (FSDF) to provide co-funding of up to 70% of qualifying expenses with the industry, and we expect to award up to 50 DSP Scholarships in the next 5 years.  I encourage financial institutions in Singapore, the universities and potential scholars to take advantage of these opportunities under this scholarship scheme.

20   On that note, I wish all of you a fruitful conference ahead.  Thank You.