larger share. a high proportion of gold on the balance sheet is no guarantee for price stability. there is another reason why gold is useful for the snb and switzerland. as part of a good diversification of currency reserves, a certain proportion of gold can help reduce the balance sheet risk. we have therefore never ruled out the possibility of future gold purchases. at the same time, however, gold is also one of the most volatile and thus riskiest investments. a high proportion of gold would increase the snb ’ s balance sheet risk. with the increasing share of gold on the balance sheet, a secondary effect would be that the profit distribution to the confederation and the cantons would likely be lower. this is because, unlike foreign currency investments, gold does not generate income in the form of interest or dividends, and any valuation gains on gold could not be realised because of the ban on sales. if, as the initiative demands, a ban on selling gold were to be enshrined in the constitution, the question would arise as to whether an immovable asset of this kind could even still fulfil the function of a currency reserve. yet, the very purpose of currency reserves is that they are available quickly and without restriction when needed. this availability in a crisis situation is important, even if – as is currently the case – we are not intending to sell gold. the availability of gold reserves also plays a role with regard to their storage. let me therefore take a look at the third component of the initiative, i. e. the demand that all gold reserves be physically stored in switzerland. decentralised storage in switzerland and abroad is in line with the basic principles of due diligence in the conduct of business and business continuity management. it ensures that the snb can in fact access its gold reserves, especially in an emergency. the same standards are applied to storing gold abroad as to storing gold in switzerland. our partner central banks keep clearly identifiable gold bar holdings for the snb. each bar stored abroad has a bar identification and remains the property of the snb. the availability of our gold holdings is fully guaranteed at all times. as with many other central banks, the snb has never made the storage locations public. the snb reviews the geographic allocation of its gold reserves periodically and adjusts it if necessary. in addition to security considerations, avoiding public discussions when gold is being relocated was one of the reasons why storage locations have so far been treated confidentially among central banks

this is eminently logical and sensible, since with more cautious bank lending and enhanced risk management within the hli sector, it should be very hard for the hlis to build up excessive leverage and concentration in the major financial markets. this measure is being pursued with earnest in both the public and private sector. the basel committee on banking supervision, and iosco have issued respective guidelines on sound practices for interactions with hlis for banks and securities firms. the latest discussion has focused on the kind of supervisory incentives for the compliance of risk management standards. the basel committee on banking supervision has put forward two proposals for the revision of the capital accord, which would help address the concerns on hlis. one is abolishing the maximum 50 % risk weighting for non - bank otc derivatives exposures ; and the other is encouraging counterparties to impose an initial margin on repo transactions. from the private sector, the counterparty risk management policy group formed by twelve leading international financial institutions produced a report in june 1999. five major hedge funds also produced an industry group report in february 2000 on improving counterparty risk management and internal control. while we agree that enhanced risk management of hlis and their counterparties is a useful first line of defence, two major concerns remain. first, the return of competitive pressure may lead to a relaxation or even a breakdown in risk management standards again in the future. there is anecdotal evidence that some large hlis are becoming less willing to supply information to their counterparties as memories of the ltcm saga are fading. it is thus important that regulators continue to promote the introduction of suitable supervisory incentives that would encourage continued compliance with sound risk management practices by the financial institutions. secondly, these proposals may not be sufficient to resolve the problem faced by smaller and open markets. even with reduced overall leverage, hlis could still build large foreign exchange positions relative to these markets. it might also be possible for hlis to build up potentially destabilising positions in smaller markets while remaining inside internal limits on leverage and / or liquidity risk. enhanced risk management cannot therefore be relied upon, in isolation, to alleviate the problem. a second proposal to enhance market stability is to improve transparency and disclosure to make markets work better. there have been two major international initiatives in this respect, one at the firm level and one at the market level. at the firm level, there is the multidisciplinary working group on enhanced disclosure, chaired by peter fisher of the federal reserve bank