Stress testing consists of assessing the attributes of a portfolio, assessing the scenarios that are likely to occur and calculating the stress loss should a crisis come to pass. With a rigorous stress-testing programme, a bank can alter the composition of its portfolio, if preset stress loss limits are exceeded during stress tests, thereby limiting its losses should a stressful event actually occur. Stress tests are fairly common for market portfolios but are still not widely used to assess stress loss of credit portfolios, particularly, loan portfolios. We are releasing on our website today a consultative paper on credit portfolio stress testing. The paper will be further developed with your inputs before we release it as a formal MAS guideline. We invite you to send in your comments by May 2002. In the coming months, financial institutions in Singapore can also expect to receive the MAS risk management guidelines for market risk, credit risk and liquidity risk management. These guidelines will spell out the key principles for sound risk management which banks are encouraged to follow. Improvements made to risk management in order to comply with these risk management guidelines will help banks develop prudent and understandable policies, and improve their methods for measuring and managing firm-wide risks. These guidelines will incorporate comments from industry practitioners and other experts in the field of risk management. Next, there will be a significant addition to Singapore’s risk management infrastructure.

The central bank is developing a new bank accounting framework, which represents a move towards international accounting standards, while taking account of the special features of Islamic finance. The authorities are also developing an action plan for implementing supervision reforms. These developments ought to be good news for prospective investors in Iran. They also help illustrate that international best practice standards can be flexible enough to accommodate individual country circumstances. The move to a more market-oriented environment brings with it new challenges. For example, liberalising exchange controls and freeing the exchange rate to market forces brings risks as well as opportunities. A sequenced approach to capital account liberalisation helps mitigate these risks and that is the route Iran has pursued. But that is not to say reform has stalled. Since mid-1999, the central bank has taken important steps to improve and simplify the foreign exchange market, including allowing the exchange rate to depreciate to market clearing levels. In March 2000, requirements to surrender non-oil export receipts to the central bank were abolished. The intention now is to introduce a direct, interbank foreign exchange market, and to eliminate an advance import deposit requirement by March 2001. These will be important further steps in increasing Iran’s exposure to international competition which in turn can contribute to its productive efficiency. Exchange rate unification and the partial liberalisation of trade and exchange controls will make greater demands on the effectiveness of monetary policy. For example, monetary expansion may arise from the phased reduction in banks’ reserve requirements.