has continued to increase, although with some moderation as of late. banks have remained capitalized at levels above both the bspregulatory requirement and the international ( bis ) standard. in addition, let me also assure you that the rural banking industry remains strong and healthy despite the recent closures of some rural banks which have been found to have been suffering from severe solvency problems. bsp initiatives and policy thrusts amidst this global crisis, the philippines has indeed remained resilient and steadfast. how have we been able to accomplish this? let me quickly go over the bsp ’ s initiatives to mitigate the impact of the crisis. and then conclude with our policy thrusts going forward. to ensure liquidity in the financial system, the bsp opened the us dollar repo facility to augment dollar liquidity in the foreign exchange market and ensure the ready availability of credit for imports and other legitimate funding requirements. the bsp also increased the budget for the peso rediscounting facility to p60 billion. regular reserve requirements on bank deposits and deposit substitutes were reduced by two percentage points. to ensure continued access to financing of small businesses, the bsp launched its credit surety fund ( csf ) program which provides guarantee to small cooperatives with good track record but without credit history. the bsp was also quick in bolstering confidence in the financial system, through timely communication with financial institutions and market participants on the minimal exposure of the banking system to troubled financial assets, such that the impact of the global financial crisis on the philippines has not been significant. monetary policy in 2009 will continue to pursue prudent rate movements mindful of price stability as the primary mandate. with the easing in the prices of oil and non - oil commodities in the world market, inflation is expected to further decelerate and be within the target range of 2. 5 - 4. 5 percent in 2009. this will give some flexibility to monetary policy to support growth. an accommodative monetary policy stance is expected to help ensure greater availability of credit and reinforce market confidence. however, given possible upside risks to inflation, a more measured adjustment of policy rates is appropriate. banking sector policies will be geared towards improving the regulatory framework, mindful of the need to protect consumers and investors. key financial and banking sector reforms will be sustained in pursuit of greater efficiency, better risk management, stronger capital base, improved disclosure and transparency practices, and enhanced corporate governance standards in the banking system

the writers of the insurance suffer a significantly negative payoff, eliminating the apparent alpha earned in good states ( figure 3 ). this was, in effect, the aig strategy. aig is believed to have written around $ 1. 0 trillion of cds protection. this strategy delivered large apparent “ alpha ” returns during the disco years. but when the music ceased and true beta was revealed, aig required state support of around $ 180bn. these five strategies are the latest incarnation of efforts by the banking system to boost shareholder returns and, whether by accident or design, game the state. for the authorities, it poses a dilemma. ex - ante, they may well say “ never again ”. but the ex - post costs of crisis mean such a statement lacks credibility. knowing this, the rational response by market participants is to double their bets. this adds to the cost of future crises. and the larger these costs, the lower the credibility of “ never again ” announcements. this is a doom loop. the “ st petersburg paradox ” explains how a gambling strategy which starts small but then doubles - up in the event of a loss can yield positive ( indeed, potentially infinite ) expected returns. provided, that is, the gambler has the resources to double - up in the face of a losing streak. the st petersburg lottery has many similarities with the game played between the state and the banks over the past century or so. the banks have repeatedly doubled - up. and the state has underwritten any losing streak. clearer practical examples of a policy timeconsistency problem are unlikely to exist. 4. resolving the time - inconsistency problem in addressing this time - consistency problem, two broad approaches are possible : redesign of the financial system to reduce the scale of insurable risks ; and redesign of the social safety net to make it less susceptible to gaming. ( a ) redesigning the financial system what options best tackle excessive risk - taking incentives? a number suggest themselves, some modest, others more radical. • introducing leverage limits : one simple means of altering the rules of the asymmetric game between banks and the state is to place heavier restrictions on leverage. european banks were not subject to a regulatory leverage ratio in the runup to crisis. they exploited that loophole. closing it would bring about a clockwise rotation in banks ’ payoff schedule, lowering the beta of banks ’ equity returns and reducing risk - taking incentives. this is an easy win. simple leverage ratios already