In addition, it will be crucial to continuously monitor the progress made in order to keep up the momentum for reform and, possibly, to identify elements that may require further follow-up action. The FSF will play an instrumental role in monitoring the efficacy of the implementation of its recommendations. I would like to point out that some of the financial system weaknesses exhibited during the recent financial market correction present more structural, longer-term challenges and will require our continued attention in the coming years. Let me draw your attention to four important issues in this regard. First, it will be crucial to ensure adequate transparency regarding financial markets, institutions and financial instruments. The availability of adequate information is the basic prerequisite for sound investment decisions, effective risk management and market discipline. In this way, transparency not only contributes to a more efficient allocation of capital, but is also the best insurance against irrational herd behaviour and the propagation of financial turbulence. Various episodes of financial stress, including the most recent one, have clearly demonstrated that the lack of reliable financial information is a key element in the excessive building up and unwinding of financial imbalances. The continuous enhancement of financial disclosure requirements, accounting rules and valuation practices in line with market developments will therefore be indispensable. Second, pro-cyclical features of the regulatory framework need to be identified and addressed.

As you can see, exchange rate movements are the main cause of changes in our foreign exchange reserves. Returns in local currency play only a secondary role. As I pointed out earlier, diversification is the only way for the SNB to mitigate the impact of foreign exchange fluctuations. Hedging would mean diluting the effectiveness of monetary policy, because purchasing protection against exchange rate movements would effectively cancel out the impact of monetary policy on the Swiss franc exchange rate. The challenges ahead To finish, I would now like talk about some of the challenges the SNB is always faced with in the management of foreign exchange reserves. First challenge: Ensuring that our resources, methods and structures guarantee the effective management of our portfolio. I have already emphasised that the complexity and risk associated with the management of our investments have recently increased significantly. This has required a corresponding increase in our management team headcount. I am confident that we now have enough staff for both the Asset Management and the Risk Management units to meet the challenge. We are also prepared to continue developing our structures should the need arise. As regards governance, we have ensured a strict separation between asset management and risk management, by transferring the Risk Management unit to another department of the SNB. Our asset managers’ performance is constantly benchmarked against the relevant markets. For some portfolios, performance is also benchmarked against that of our external asset managers. Second challenge: Achieving optimal portfolio diversification.