##ing with regulation. also, we need to ensure we have sufficient information to judge whether there are systemic vulnerabilities in the mexican financial system. it is a field that ’ s not very developed in central banking though many central banks are taking similar steps. you must have all the evidence at hand to do the analysis for macro and micro issues. you also need to have coordination between the authorities. in addition to information gathering, we ’ ll have more resources devoted to analysis and also have the ability to make policy recommendations. when you say policy recommendations do you mean just in terms of regulation or also in the context of monetary policy? the idea is to see the whole map and even to make policy recommendations in areas that might not be in the direct control of the central bank. it is not only the central bank that ’ s focusing on financial stability. it is also the finance ministry and the financial regulatory agencies. through a presidential decree a financial stability board has been created, on which there are representatives from the central bank, the ministry, the deposit insurance institute and the regulators. the secretariat is housed within the central bank and a lot of the work in the financial stability department will feed into the financial stability board. the idea of the department is therefore not only to deal with areas in the domain of the central bank, but also to contribute to the discussion that will occur at the level of the financial stability board, the council for stability of the financial system. what powers will that financial stability board have? more than anything, the motivation for setting it up was to have a structure through which you could have formal coordination of policy between the financial authorities. the policies that will be agreed at that level will be implemented through the authorities represented on the board. the idea is to evaluate the system as a whole and then to quell any vulnerabilities as they emerge. there are some grey areas among the authorities, but the idea behind this is that you ’ re more likely to have a coordinated, timely response rather than overreacting. does the fact that the financial stability board could in theory call for a rate hike to tackle financial imbalances not conflict with your inflation targeting framework? not really. the idea is to respect as much as possible the mandates of each authority. if there is, say, asset - price inflation and there is a threat to financial stability, then it might be possible to address the issue through regulatory aspects rather than interest rate hikes. the idea is to align the

the qis4 exercise was conducted on a best - efforts basis without close supervisory oversight. it was just one step in a progression of events leading to adoption of the basel ii framework. it is certainly the case that as we move closer to implementation, supervisory oversight of the basel ii implementation methodologies by our examination teams would increase. indeed, during the qualification process, we expect to have several additional opportunities to evaluate institutions ’ risk - management processes, models, and estimates - - and provide feedback to the institutions on their progress. so while the qis4 results clearly provided a much better sense than before of the progress in implementing basel ii and offered additional insights about the link between risks and capital, qis4 should not be considered a complete forecast of basel ii ’ s ultimate effects. it was a point - in - time look at how the u. s. implementation was progressing. trading book risks in discussions about basel ii, not as much attention has been given to the addendum issued earlier this year by the basel committee, which includes rules to strengthen the capital regime for banks ’ trading activities. the existing capital regime for trading activities was formulated in 1996 and set forth an internal value at risk ( or var ) approach for measuring trading exposures. it was recognized at the time that var models may not adequately capture certain risks, or may not accurately account for socalled “ fat tails ”. for that reason, supervisors subjected banks ’ var results to a multiplier to arrive at a more substantial capital charge. during the past decade, a number of changes have taken place in the composition of banks ’ trading books that have led supervisors to question whether the 1996 capital regime remains appropriate. trading books today include many more credit - related products, as well as other structured and exotic products, that are far less liquid than the products for which the 1996 regime was designed. these new products also give rise to new types of risk that the capital regime did not contemplate or capture. moreover, supervisors were concerned that this increase in credit and liquidity risk in the trading book would accelerate as accounting standards move more and more to the use of fair value and as basel ii removes the eight - percent cap on banking book regulatory capital charges, giving banks an incentive to move their highest risk banking book positions to the trading book. to address these issues, the june 2005 basel paper set forth a number of improvements to the trading book regulatory capital regime including : a requirement that banks have policies and procedures for determining