Investors would have anticipated that common equity would be replenished automatically if a firm came under stress, and this knowledge might have tempered anxieties about counterparty risk. At a minimum, contingent capital instruments might have enabled common equity buffers at the weaker firms to be replenished earlier and automatically, thereby reducing uncertainty and the risk of failure. On the liquidity front, there are a host of initiatives underway. The Basel Committee on Banking Supervision is working on establishing international standards for liquidity requirements. There are two parts to this. The first is a requirement for a short-term liquidity buffer of sufficient size so that an institution that was shut out of the market for several weeks would still have sufficient liquidity to continue its operations unimpaired. The second is a liquidity standard that limits the degree of permissible maturity transformation – that is, the amount of short-term borrowing allowed to be used in the funding of long-term illiquid assets. Under these standards, a firm’s holdings of illiquid long-term assets would need to be funded mainly by equity or long-term debt. With respect to financial market infrastructures, the Federal Reserve is working with a broad range of private-sector participants, including dealers, clearing banks and tri-party repo investors to dramatically reduce the structural instability of the tri-party repo system. Similarly, over-the-counter (OTC) derivatives clearance activity is being pushed toward central counterparties and exchanges. In addition, the Federal Reserve and others are evaluating how greater transparency with respect to OTC derivatives prices would improve financial stability.

Principle 7 – reporting and disclosure “The board shall demand integrity both in financial reporting and in timeliness and balance of disclosures on the institution’s affairs.” The guidelines for this principle require that the institution’s financial statements fairly present the state of affairs of the institution as at the end of the financial year and the profit or loss and cash flows for the reporting period. Furthermore, the annual report is expected to state whether the corporate governance guidelines have been adhered to or, if not, where there has not been compliance the institution is expected to give reasons. Mr Chairman, as you will note the four principles highlight the fact that the Bank of Zambia places a great deal of importance on integrity and professionalism in the financial sector. Our expectation is that this should extend to other economic sectors as well. Lessons can thus be drawn from the work that the Bank of Zambia has done and can be applied to the other sectors. Mr. Chairman, the prevalence of fraud in institutions all over the world has culminated with regulatory authorities in several jurisdictions instituting jail terms and fines against the scourge. The famous Sarbanes-Oxley is one such response. Our own corporate governance guidelines have a strong linkage to the Banking and Financial Services Act which when not adhered to may result, upon conviction, to a fine or to imprisonment for a term not exceeding two years or to both.