sada reddy : liquidity risk in banking organisations opening remarks by mr sada reddy, governor of the reserve bank of fiji, at the 2009 afspc annual workshop and meeting, denarau, nadi, 26 october 2009. * * * mr jason george : senior financial sector specialist, bis ; distinguished resource persons ; representatives of the pftac office ; honoured participants and fellow central bank colleagues ; bula vinaka, and let me extend to you all a very warm welcome to the fiji islands. i am delighted to be here this morning to address this annual gathering of bank supervisors from the pacific, on the important subject of liquidity risk in banking organisations. may i commend pftac and the afspc for choosing this topic for this year ’ s workshop. this is a very appropriate topic for pacific supervisors, given what has transpired in the global financial system in the last 12 - months. i note from the programme that we have very distinguished resource persons to guide us in the area of liquidity risk management. however, at the outset, i would like to share with you some recent developments that have taken place in fiji with regard to the supervisory role of the reserve bank of fiji. i intend to do this as i presume that one of the greatest benefits of this kind of gathering is the networking and sharing of each other ’ s experiences. recent developments in fiji the global financial crisis has had a significant spill - over effect on the liquidity of our financial system. the spill - over effect was brought forth mainly by lower foreign reserve inflows. the floods in january this year also affected most of the businesses especially here in nadi, and as a result, further strained the liquidity available in the banking system via withdrawals and the need for banks to lend to assist in flood rehabilitation works. this was a challenging time for our commercial banks as was witnessed by the increased activity observed in the inter - bank money market. to address the threat that our financial system faced, the reserve bank responded with a mix of policy measures during the year, including the reduction of the statutory reserve deposits requirement, tightening of exchange controls, devaluation of the fiji dollar, controls on banks ’ interest rates and spreads, and re - emphasising the importance of lending to priority sectors for a sustainable future. the bank also introduced a flood rehabilitation facility to assist in the reconstruction and business resumption due to the flood damages. lending rates of our licensed banks were trending

a quick overview of the approach to financial consumer protection adopted by the bank of italy. simon, h. a., “ models of man, social and rational : mathematical essays on rational human behavior in a social setting ”, new york : wiley & sons, 1957. g20 high - level principles on financial consumer protection, october 2011 ( www. oecd. org ). behavioural economics relies heavily on the seminal studies by daniel kahneman and amos tversky, 4 two psychologists, one of whom ( kahneman ) got a nobel prize in economics for it ( tversky, sadly, did not live to get the share he deserved ). this is, by the way, not an isolated case ; it bears witness to the fact that the economics profession, in its best moments, is open to contributions from other disciplines to refine its understanding of human behaviour and interactions. behavioural economics has provided evidence that, when taking decisions, people regularly deviate from certain accepted canons of rationality, as intuition often prevails over reasoning. 5 such deviations are not random. laboratory experiments, though mostly confined to simulated environments, do provide rather convincing evidence that biases affect the decisions of consumers in a systematic way. for financial services providers, knowledge of this can make competing on quality and prices less attractive relative to leveraging on these biases in their marketing activity using opportunistic business practices. the list of biases is an evolving one ; here, i will only mention a few of those that are most relevant from a financial consumer protection perspective and represent a common background for business conduct supervisors. they include : i ) mental shortcuts used to generate approximate answers to questions ( heuristics ) ; ii ) the influence of the way information is presented on the way decisions are taken ( framing effect ) iii ) the fact that outcomes are usually assessed against a reference point ( reference dependence / anchoring effect ), implying that different reference points affect the perception of gains and losses ; iv ) a preference for immediate gratification, resulting in decisions that do not maximise long - term net effects ( present bias ) – e. g. people overestimate their ability to repay loans, resulting in over - indebtedness ; v ) the fact that people often demand much more to give up an object than they would be willing to pay for it ( endowment effect ) ; this helps explain, e. g., why switching rates among products from different financial