It sets out the requirements with regard to the security and liquidity of the investments and also defines the eligible currencies, asset classes, instruments and borrowers. On this foundation, the investment policy establishes a long-term allocation for the foreign exchange reserves. Based on this long-term allocation, the Governing Board determines a specific investment strategy. This sets out the allocation of individual asset classes over the next year and defines the freedom of action at operational level. A valuation assessment of the individual asset classes is also taken into account in the investment strategy. Depending upon the assessment, this allows for certain deviations from the long-term allocation with regard to currency allocation, equity share or bond duration. In the third step, prior to the investment strategy implementation, the Risk Management unit sets out the necessary investment guidelines, limits and benchmarks. It also defines the permissible margin of deviation from the investment strategy at the tactical level. These parameters are very important for the fourth step, implementation of the investment strategy. Decisions on tactical allocation are made by an internal investment committee which makes periodic adjustments of given variables such as currency shares, maturity and shares of different asset classes to changes in market conditions, within the strategic range. The majority of investments are managed by internal portfolio managers, but external asset managers also play an important role. These external managers are used to obtain efficient access to certain asset classes or for benchmarking against internal portfolio management.

In the face of this exceptional conjuncture, the monetary authorities and the governments of the main developed economies have acted in coordination to adopt a set of far-reaching measures commensurate with the scale of the financial crisis facing us. Although we cannot expect that these measures will immediately correct the difficult economic situation at hand, but rather that the process of adjustment will be slow and laborious, they should however help financial institutions to resume normal operations and restore confidence to the financial markets. How does this exceptionally difficult situation affect the Spanish banking system? What means are available to those of us in Spain who, in our different areas of responsibility, participate in the financial system? During my talk I will try to answer these two questions, but allow me first to dedicate a few minutes to clarifying where Spain stands in the difficult situation besetting the international financial system. International context The financial crisis under way from summer 2007 to date can be divided into three phases. The first phase ran from August 2007 to the beginning of last September and was characterised by the impact of the financial turmoil on the balance sheet and income statements of numerous financial institutions at international level. This turmoil originated in the subprime mortgage segment, although it progressively spread to lower-risk financial statements. One of the business segments which had grown up in the US mortgage market was characterised by the extension of mortgages to individuals or households with scant ability to meet their payment commitments.