##amitous on a scale massively exceeding the dreadful near - seizure we did experience in the money markets. that example was a public sector initiative ; the banks were more or less herded into it. but there is an equally important private sector initiative. without the collateralisation of otc - derivative counterparty credit exposures, the credit spillovers from firm and fund failures around the world would surely have been much greater. what those two examples demonstrate is that the authorities and practitioners can get things right – when we focus on what will matter in bad states of the world. summary the turner report makes a big contribution to developing the agenda for reforming the global financial system, including on macroprudential oversight. if anything, i may have added to that agenda this morning. we need to undertake serious research and analysis on whether we can develop a macro instrument for taming the credit cycle. but, in making the system more resilient, we cannot rely solely on bank capital or loan market requirements. that endeavour – heading - off incipient stress, and keeping the “ rules of the game ” up to date and fit for purpose – requires high - quality surveillance of the system as a whole, bringing together analysis, experience and intelligence on markets, the macro environment, the infrastructure, firms. we have to identify and address faultlines. the system ’ s strengths and weak points “ morph ” over time. one era ’ s solution may be today ’ s or tomorrow ’ s faultline : fannie mae is an example of that. and, for when those efforts fail, we need to be clearer about how the authorities will intervene to preserve stability, and whether we can construct a “ capital of last resort ” policy that does not create perverse incentives during “ peacetime ”. surveillance, building system resilience, crisis management. a macroprudential approach to stability has to do rather more than bring together a central bank ’ s macroeconomists and a micro regulator ’ s line supervisors. what lies in between matters hugely : markets, payment systems, the plumbing. i should like to think that, amongst others, central banks can bring something to this, drawing on our conjunctural expertise, but also on our operational presence in money and bond markets and at the heart of the payments and settlements system. certainly the bank will engage actively with the fsa, hmt, overseas central banks, and the industry in designing new “ rules of the game ” for

##ly affected in cases of conversion of a large portion of debt into equity and / or preference shares. the working group noticed that the trend of such conversion has increased recently, especially in cases of large exposures restructured under cdr mechanism. the working group observed that such conversions were akin to writing off the debt as in many cases the preference shares carried zero or low coupon, added with the fact that they had no market value as also they did not carry voting rights unlike the equity shares. bis central bankers ’ speeches in view of the above, the working group felt that there should be a ceiling / restriction on conversion of debt into zero / very low interest preference shares. another view was that rbi should prescribe a minimum coupon ( say yield on 364 days tbs ) on such preference shares. the working group also observed that in some cases of restructuring, unreasonable losses were allocated to the lenders as a result of conversion of debt into equity shares at a very high premium over the current market price. it was also observed that the lenders suffered heavy losses due to further decline in the market prices of such shares. in view of this, the working group felt that rbi may prescribe that conversion of debt into equity shares on restructuring cannot take place at off market rates, i. e., at a price which is higher than the latest available market price. the working group felt that the conversion into unlisted shares should be restricted due to the limited exit options available to banks for unlisted shares. the working group recommended that any conversion of debt into equity should be done only in the case of listed companies. there are suggestions to take up the issue with sebi for rationalising the norms on conversion price of debt into equity in cases of restructuring by banks. the working group recommended that conversion of debt into equity / preference shares should, in any case, be restricted to a cap ( say 10 % of the restructured debt ). we have received very favourable comments in this regard. some have suggested that conversion of debt into preference shares should not be permitted at all. exit option another important recommendation of the report arose from the observation that banks were stuck with accounts which were restructured on being found viable, but later turned to be slow in achieving the projected viability ratios. in some cases promoters did not bring the funds as promised and the required equity could not be raised due to depressed market conditions or due to the company ’ s deteriorating financial health. the working group observed that although